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Choice of OVDP Program- Irrevocable?

Several taxpayers sued the IRS to remove them from the OVDP program and allow them entrance into the streamline program, an alternative program open to taxpayers after July 1, 2014.  The government moved to bar the suit under the Anti-Injunction Act.  The U.S. Court of Appeals for the D.C. Circuit agreed with the government, finding the OVDP / Streamline switch would “restrain” the government’s ability to collect tax if allowed.

The taxpayers raised a number of alternative arguments including that the alternative relief provisions of the OVDP (i.e., the transitional relief) violated the Administrative Procedure Act, for failure to provide proper notice and comment as well as equal treatment of similarly situated taxpayers.  It is notable that the IRS offshore voluntary disclosure programs did not receive publishing or commentary before being issued, changed and revised since their first issuance in 2009.  The argument did not persuade the Court.  The case is Maze v. IRS, D.C. Cir., No 16-05265.  Questions regarding the various IRS Offshore Voluntary Disclosure Programs can be directed to Jim Mastracchio, (james.mastracchio@dentons.com).  Mr. Mastracchio’s comments to Bloomberg BNA regarding the decision can be found in the July 17, 2017 issue of the Daily Tax Report.

Partnership Proposed Regulations Re-Released

Today, the prior January 2017 partnership audit proposed regulations were re-released.  A pubic hearing is scheduled for September 18th with comments due by August 14th.  We will monitor the commentaries as they are filed and post them HERE.

The Other Testimony on June 8th

While it seems the world was watching the testimony of the former FBI director yesterday, another hearing was underway.  The Acting Assistant Attorney General for the Tax Division provided a report to Congress on the Tax Division’s activities and requests.  Staffing and funding requests for the next fiscal year remain about the same, $107 million and 499 direct employees.

Included in the 18-page report were examples of criminal prosecutions and investigations involving five main areas of focus: (1) abusive tax shelters; (2) offshore tax evasion; (3) employment tax enforcement; (4) stolen identity refund fraud; and (5) tax defiers.  Notably, there was a large uptick in the number of criminal employment tax enforcement investigations and prosecutions.  The report suggested continued focus in the employment tax arena.

Also noted in the report was the amount of information received through the DOJ/Swiss bank settlement program and related treaty requests for additional information.  Whistleblowers were also mentioned as a source of off-shore investigations.  The report mentioned that new criminal and civil cases were being pursued as the tremendous amount of information is still being reviewed by the government.

There was no mention of changing the current focus in the above mentioned areas nor was there any mention of the termination of the IRS Offshore Voluntary Disclosure Program or Streamline procedures, although there seems to be some rumblings that those programs may be ending in 2017.

All of this means taxpayers should take advantage of the settlement programs if tax non-comliance is an issue.  Contact Jim Mastracchio for questions about this post or IRS OVDP programs in general James.Mastracchio@dentons.com.

Partnership Audit Guidance Soon?

On January 1, 2018 the new partnership audit rules become effective.  Proposed regulations were issued in January of this year to provide broad-based guidance on the implementation and operation of the new statutory regime, but those proposed regulations were withdrawn in the same month due to the new administration’s position freezing proposed regulations and requiring agency review before re-issuance.  With a little over six months to go before the new rules become effective, a considerable amount of uncertainty associated remains and regulatory guidance is desperately needed.  At this point, gaining an understanding of the proposed/withdrawn regulations is the best course of action, as there is no current indication that the proposed rules will be altered in a material way, if issued by the end of the year.

OVDP Campaign – Declines and Withdrawals

In January, the IRS released a list of 13 audit campaigns designed to focus resources on areas of concern for the IRS examination teams.  Since that time, additional campaign areas have been added to the list of IRS priorities.  Most recently, comments regarding the Offshore Voluntary Disclosure Program campaign have clarified the focus of this particular initiative.  Taxpayers selected for review will include those taxpayers who made an application for pre-clearance into one of the OVDP programs available since 2009, but were denied entry.  Historically, a denial occurred if the taxpayer was under civil examination, criminal investigation, or the foreign account activity was already known to the IRS or DOJ Tax Division.

The second prong of the campaign focuses on those taxpayers who withdrew from participation after receiving pre clearance but before acceptance into one of the OVDP programs.  Recent clarifications revealed that an “opt out” was not part of the campaign- given the fact that opt-outs or IRS removals made once the taxpayer was accepted into the OVDP, receive almost immediate civil examinations as part of the on-going OVDP procedure.

“While we have represented taxpayers who were denied entrance into the OVDP programs over the past eight years, a renewed focus on those individuals raises the stakes for this class of taxpayer,” said Jim Mastracchio, Chair of Dentons U.S. Tax Controversy Practice.  Under the campaign audit process, taxpayers will be evaluated as (i) subsequently compliant, (ii) requiring soft-letters for immaterial noncompliance, or (iii) regular examination process.  “It is the latter group of taxpayers with the most exposure to civil and possible criminal referral,” added Mastracchio.

We will provide additional information as this particular campaign progresses.  Questions regarding the OVDP process, Streamline program, or litigation of FBAR penalties can be forwarded to James.Mastracchio@Dentons.com, (202) 496-7251.

IRS Won’t Shut Down

It appears both the House and Senate will pass H.R. 244, to appropriate funds for the IRS sometime later this week.  The IRS is slated to receive $11.2 billion in new funding through next September 30.  This  funding is at a level about equal to the last full year appropriations bill.

The IRS will need to slate sufficient funds for enforcement while balancing compliance and customer service.  The latter receiving criticism on a number of fronts over the past year.  We will comment on the appropriation specifics once released.

The Dirty Dozen – Top Concerns For 2017

With the tax filing season now open, the IRS has listed its top 12 tax scams and warned U.S. taxpayers that participation in these prohibited activities could result in civil and criminal tax exposure.

In addition to false refund claims, once again, Abusive Tax Shelters and Offshore Tax Avoidance made the list.  Below is a copy from the text of the release:

Abusive Tax Shelters: Don’t use abusive tax structures to avoid paying taxes. The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them. The vast majority of taxpayers pay their fair share, and everyone should be on the lookout for people peddling tax shelters that sound too good to be true. When in doubt, taxpayers should seek an independent opinion regarding complex products they are offered. (IR-2017-31)

Offshore Tax Avoidance: The recent string of successful enforcement actions against offshore tax cheats and the financial organizations that help them shows that it’s a bad bet to hide money and income offshore. Taxpayers are best served by coming in voluntarily and getting caught up on their tax-filing responsibilities. The IRS offers the Offshore Voluntary Disclosure Program to enable people to catch up on their filing and tax obligations. (IR-2017-35)

The IRS Offshore Voluntary Disclosure programs offer a range of filing options, with many taxpayers qualifying for low or no penalties when coming into compliance.  If you have questions about the IRS programs and U.S. filing obligations, please contact, Jim Mastracchio (202-496-7251) or james.mastracchio@dentons.com.

IRS Announces 13 Campaigns – New Focus

The Large Business and International division of the IRS has restructured its approach to examinations.  Yesterday, it released its list of 13 focus areas for issue- based examinations and concerns for compliance.   One of those areas involves the IRS Offshore Voluntary Disclosure Program.  Entitled, “OVDP Declines-Withdrawals Campaign,” this area of focus involves taxpayers who have applied for the offshore voluntary disclosure program through the pre-clearance process, but were either denied access to the program or withdrew from the program.

What happens next?  “The IRS will address continued noncompliance through a variety of treatment streams including examination.”  Examining those taxpayers who could not enter the program, because they are under civil audit, criminal investigation, or the IRS is otherwise aware of the account(s) at issue in the disclosure, is expected. Further, those who violated the law intentionally might expect a criminal tax investigation or possible referral for prosecution, depending on the circumstances and reasons for denial into the program.

We have seen an uptick in audits and FBAR inquiries associated with taxpayers who have not come forward, and certainly anyone who opts-out of the OVDP program is subject to an immediate audit of their tax returns and FBAR filings.  “Making this effort a ‘campaign’ certainly raises the awareness of the programs and need to quickly come into compliance and assures that resources are available to support the audits and other investigations,” says Jim Mastracchio, Co-Chair of Dentons National Tax Controversy Practice.

The Destination Based Cash Flow Tax – Is it a VAT?

As tax reform proposals are considered over the next few months, the concept of a destination based cash flow tax remains in the GOP proposal.  This type of corporate tax acts like a VAT, but with some allowable deductions, such as payroll.  And the boarder adjustment is a driving feature of the proposal.

The boarder adjustment feature would exempt from tax sales of goods exported outside of the U.S.  However, the cost of goods purchased by a U.S. company from foreign sources would not be deductible against the the corporate tax.  So, the tax would be imposed on goods produced and sold in the U.S.

The proposal also allows for full deductions of capital investments with no depreciation required (but does not allow interest payments to be deducted).  This is similar to most VAT systems and is touted as a provision that will spur investment.

A reconciliation between the current administration’s tax plan and the GOP plan is underway, and we won’t have wait too much longer to see if the corporate rate drops to 15% or 20% and whether we the destination based cash flow tax survives.

Tax Regulations on Hold-The New Regulatory Freeze

According to a memorandum issued to all agency heads, no federal agency may send regulations to the Federal Register for publishing until advised by the appropriate OMB personnel or designee.   For those regulations that have already been submitted to the Federal Register the agency heads must seek to withdraw them.  Any regulation that has been published in the Federal Register, but aren’t yet effective, those regulations will be postponed a minimum of 60 days with the ability of the agency heads to request a longer suspension.

The only exception are regulations needed for “urgent circumstances relating to health, safety, financial, or national security matters, or otherwise.”  The memorandum explains that the department heads and newly appointed personnel need time to review the regulations and the memorandum is particularly clear that those regulations addressing “questions of fact, law, or policy” could be subject to “further notice-and-comment rule making,” thus further delaying implementation.

There is no carve out in the memorandum for regulations addressing tax matters.  Which tax regulations will become promulgated is not known.  We will keep you posted on any new developments.

Partnership Proposed Regulations Issued – New Audit Rules For Partnerships

The IRS has issued Proposed Regulations addressing the Centralized Partnership Audit Regime.  Back in November of 2015, statutory changes were enacted to replace the traditional audit rules for partnerships and replacing them with a new centralized partnership audit which, in most instances, places the tax liability at the partnership level rather than at the partner level.

Partnerships are pass through entities for US tax purposes and items of income, expense and credits are taken on the personal income tax returns of the individual partners.  Under the new statute, an audit of the partnership could result in additional taxes being owed at the partnership level rather than flowing through to the individual partners.

“It has taken over a year for the proposed regulations to be issued,” said James N. Mastracchio, Co-Chair of Denton’s Tax Controversy Practice, “and that is a good thing.”  The proposed regulations are “extensive” and “cover a number of issues that we face as advisors to our clients.” added Mastracchio.

There will be a long comment period with the ultimate effective date of the regulations to take place in early 2018.

Is Your Conservation Easement a Listed Transaction?

If you invested in a partnership or other passthrough entity, which provides pass-through deductions for conservation easements, that arrangement may be considered a “syndicated conservation easement” and a “listed transaction,”  and you may be faced with  new IRS reporting obligations.

According to Notice 2017-10, if you entered into this type of arrangement on or after January 1, 2010, and if that arrangement is “the same as or substantially similar to” the syndicated conservation easements described in the Notice, the “listed transaction” provisions of  §1.6011-4(b)(2) and §§6111 and 6112 become effective December 23, 2016.  If these provisions apply, you must disclose the transaction to the IRS, for each taxable year in which you participated in the transaction, provided that the period of limitations for assessment of tax has not ended on or before December 23, 2016.  Failure to disclose your participation can result in stiff civil monetary penalties.

Further, according to the Notice, promoters, material advisors, including appraisers, who make a tax statement on or after January 1, 2010, with respect to transactions entered into on or after January 1, 2010, have disclosure and list maintenance obligations under §§6111 and 6112. See §§301.6111-3 , 301.6112-1.  Failure to comply with these provisions also carries significant civil monetary penalties.

With the 2016 income tax filing season opening this month, this issue may affect tax returns filed in the coming months and requires a look-back to 2010 as well.  For questions regarding syndicated conservation easements, or listed transactions, please contact Jim Mastracchio at (202) 496-7251; james.mastracchio@dentons.com

 

Foreign Exchange Rates and the Exit Tax

We have seen several advantages from the increase in the U.S. dollar strength against foreign currencies when tackling the Exit Tax.  Several clients have dropped below the $2 million thresholds and others find they have much lower gains on deemed sales when calculating the tax.  While dollar strength can cause other issues, abandoning green cards and U.S. citizenship renunciations are seeing benefits.  For advice regarding U.S. taxpayer status, filing requirements and related disclosure requirements contact Jim Mastracchio, james.mastracchio@dentons.com (202) 496-7251 for a confidential consult.

Foreign Records Exception – 2nd Circuit Remands

Yesterday, the Second Circuit remanded a case involving foreign bank records for further development.  In U.S. v. Natalio Fridman, the taxpayer asserted his act of production privilege over certain foreign bank records demanded by an IRS summons.  The District Court held that such records must be produced based on the foregone conclusion doctrine, the collective entity doctrine, and/or the required records exceptions to the Fifth Amendment’s protection.  The Second Circuit found that the record was insufficient to allow meaningful Appellate review of these rulings, and remanded this portion of the case for further development.

This case is important in that it will again examine whether a taxpayer is compelled to produce foreign bank records that may be incriminating under the required records exception.  If the summons is ultimately upheld for those records falling within the 5-year record retention requirement of the required records exception, any remaining records falling outside of that timeframe may need to be analyzed under the forgone conclusion and collective entity doctrines, which were raised by the government.  If the case proceeds in this manner, it will be interesting to see how those doctrines will be applied to foreign bank records involving a trust structure, in yet another foreign bank record production case.

 

Fast Track Settlements for Collection Cases

Late last year the IRS issued guidance on Fast Track settlement procedures for collection cases.  The goal of the process is to provide resolution of disputed issues within 30-40 calendar days.  Generally, issues involving an offer-in-comprise or trust fund recovery penalties can be brought before an Appeals mediator.  The new program is called SB/SE Fast Track Mediation- Collection (FTMC) and should provide a meaningful avenue to resolve differences.  Ultimate settlement authority continues to reside with Collections and not with IRS Appeals.  See guidance at Rev. Proc 2016-57.

2017 US Tax Filing News

As we head into a new year, some tax reporting news to keep in mind.  The first day that you can file your 2016 US individual income tax return by paper or by electronic submission is January 23, 2017.  The regular filing season ends April 18, 2017, as April 15 falls on a Saturday and Monday, April 17 is Emancipation Day observed in Washington, DC.

While we expect tax law changes to be announced in 2017, here are some current standard dollar limits:   Start of the Top Tax Bracket for joint filers (39.6%)  –  $466,950 (2016); $470,700 (2017); Gift Tax Annual Exclusion  $14,000 (2016 and 2017); Personal Exemptions $4,050 (2016 and 2017).

And don’t forget, those with foreign accounts or signatory authority over non-US accounts must file the FBAR (FinCEN Form 114) on the due date of the US Income tax return.  If you seek an extension for your income tax return you can seek an extension to file the FBAR.  Other rules apply to U.S. persons residing outside of the United States.  We will keep you posted on these and other new tax developments as they arise in what will be a busy tax news year.

 

 

 

Data Protection and the Swiss – DOJ Settlement Program

The program for non-prosecution agreements for Swiss Banks is largely settled. However, in a ruling by the Swiss Courts a few weeks ago, a bank in the Canton of Ticino was prohibited from releasing the names of two Swiss attorneys who acted as proxies for American customer accounts. Further, the name of a law firm who assisted U.S. persons was also withheld.

The participating bank was in the process of complying with the Settlement Program and it intended to release the names of the lawyers and law firm as part of the disclosure process, but a suit followed to block the release of the information.  Ultimately, the Swiss court held that the names should be protected from disclosure under its laws. The Court also found that the U.S. lacks similar legislation to provide adequate data protection.

Last week, U.S. authorities have indicated that by mid-November an expanded list of banks and facilitators would be published. That list mandates a 50% penalty, as opposed to a 27.5% penalty, for U.S. persons entering the Offshore Voluntary Disclosure Program.   For those U.S. persons who have not yet come into compliance with their U.S. tax obligations, time is growing short. Please contact Jim Mastracchio with any questions regarding the IRS disclosure programs (james.mastracchio@dentons.com).

DOJ and IRS Expanding Offshore Enforcement Efforts: Financial Institutions and Individual Taxpayers Beware

A few months ago, we posited that the DOJ and IRS were expanding offshore enforcement efforts beyond Europe, with a likely new target of those efforts being Singapore. Recent developments confirm as much, and suggest that financial institutions and individual taxpayers alike should take heed.

A DOJ representative recently commented at a meeting of the Tax Section of the American Bar Association that the DOJ and IRS are in the process of identifying new targets and areas with potential criminal tax exposure. No specific jurisdictions were identified, but the data and information at the government’s disposal is vast. It has been amassing information from multiple sources, including the Swiss bank program, the offshore voluntary disclosure program (OVDP), and John Doe summonses.

On top of that, a number of countries have been automatically exchanging information with the U.S. government under intergovernmental agreements (IGAs) to implement the Foreign Account Tax Compliance Act (FATCA). The list of countries with IGAs is growing – Singapore, for example, will soon be among them. In August 2016, the United States and Singapore announced they will enter into a TIEA and an IGA, possibly as early as the end of 2017.

Those U.S. persons with bank accounts in foreign jurisdictions who have yet to come into compliance with U.S. tax filing requirements have very little time.  In addition to the increased level of material being sent to the U.S., the DOJ has announced that it will be adding approximately 40 more “facilitators” to a list of banks and institutions that trigger the higher 50-percent penalty under the OVDP.  As we have previously noted, the IRS has a series of voluntary disclosure programs and other options to come into compliance with U.S. filings, some of which can give rise to zero penalties.  The primary program imposes a penalty at 27.5% – with the higher 50% penalty being associated with the institutions on the list.  According to DOJ, taxpayers can avoid this higher penalty for the 40 new facilitators, if they make a voluntary disclosure by November 15, 2016.

If you have questions about this post or the IRS disclosure options, please contact Jim Mastracchio (james.mastracchio@dentons.com) or Jennifer Walrath (jennifer.walrath@dentons.com).

Leak of 1.3 Million Files from Bahamas Corporate Registry Provides Yet Another Starting Point for Government Investigations

Five months after the Panama Papers leak of offshore client files, the International Consortium of Investigative Journalists (ICIJ) have released data from the corporate registry in the Bahamas pertaining to approximately 1.3 client million files. This information was originally leaked to of journalists at the German newspaper Süddeutche Zeitung, who reached out to the ICIJ to facilitate the public release of this information.

The Bahamas are yet another jurisdiction often referred to as a tax haven due to its secrecy laws and structuring possibilities attributable to the absence of taxes on company profits, capital gains, income and inheritance. The Bahamas claims to be a transparent jurisdiction with a public register of companies, but the information shared from the seat of government in Nassau is limited. Although the Bahamas Corporate Registry is supposed to contain the names and addresses of all directors and officers, there is no requirement to register the owners of a company with the authorities. Unlike the Cayman Islands and Jersey, the Bahamas has not responded to public pressure to introduce government-held registers of beneficial owners.

The leaked information contains the names of directors and some shareholders at nearly 176,000 shell companies, trusts and foundations registered between 1980 and 2016 in the Bahamas. Specifically, the data released include the leaked company’s name, its date of creation, the physical and mailing address in the Bahamas and, in some cases, the company’s directors.   The leaked documents also include the names of 539 registered agents, who served as intermediaries between Bahamian authorities and customers who wish to create an offshore company. Among them is Mossack Fonseca, the law firm whose leaked files formed the basis of the Panama Papers, which set up 15,915 entities in the Bahamas.

Because the secrecy laws in the Bahamas do not require information relating to beneficial owners, ICIJ noted that the information on the directors named in connection with a Bahamian firm may not “truly control the company or act as nominees, employees-for-hire who serve as the face of the company but have no involvement in its operations.” However, the ICIJ stated in its report that the data released involved the basic building blocks of offshore companies, which can be used by investigators as “starting points on the trail of wrongdoing.”

Those US persons who have not come into compliance with their US tax obligations have yet another incentive to seek legal counsel. Questions regarding this post or the IRS Offshore Voluntary Disclosure Programs can be sent to Jim Mastracchio (james.mastracchio@dentons.com) or Sunny Dhaliwal (sunny.dhaliwal@dentons.com).

Israel Cleared to Implement FATCA and Report on U.S. Persons

A recent decision by the Israeli Supreme Court has cleared the way for FATCA implementation by lifting a temporary injunction on the disclosure of information to U.S. authorities under Israel’s intergovernmental agreement (IGA). In connection with the decision, the Israeli government has agreed to give individual taxpayers at least thirty days to object to the inclusion of their information in data transferred to U.S. authorities under the IGA.

The government also agreed to delay the implementation of the IGA to September 30, 2016. Israeli financial institutions now have until September 20, 2016, to provide the Israeli Tax Authority with the required data on U.S. taxpayers. This is a notable development in Israel where, reportedly, as much as five percent of the population – upwards of 300,000 people – holds U.S. citizenship.

The decision arose from Republicans Overseas-Israel, et al. v. Israel, et al, where the plaintiffs challenged the constitutionality of FATCA implementation under Israeli law, claiming that the IGA’s required reporting to U.S. authorities violated Israel’s sovereignty. Earlier in September, the Israeli Supreme Court issued a temporary injunction preventing the disclosure of financial information to U.S. authorities under the IGA. In its more recent decision, however, the Court rejected the challenge to Israeli sovereignty and analyzed the claim as an issue of privacy. The Court considered whether the privacy of U.S. taxpayers was being infringed and, if so, whether the harm was reasonable. It assumed that there was some infringement on privacy, but found that the privacy concerns were outweighed by the need for Israel to abide by its agreement to provide international financial cooperation, and that Plaintiffs failed to show that the State did not limit the impact on privacy as much as was possible.

For those U.S. persons with Israeli bank accounts who have yet to come into compliance with U.S. tax filings, there is little time remaining. The IRS has announced a series of voluntary disclosure programs and options, some of which can give rise to zero penalties. Should you have questions regarding this post or the IRS disclosure options, please contact Jim Mastracchio (james.mastracchio@dentons.com) or Jennifer Walrath (jennifer.walrath@dentons.com).

Taxpayers Putting Pressure On Courts to Establish The IRS’s Burden Of Proof In Offshore Disclosure Cases

Recently, the U.S. Fifth Circuit Court of Appeals, in Bernard Gubser v. IRS, et al., was asked to overturn a recent U.S. District Court’s decision. The case involved the appropriate burden of proof the Internal Revenue Service (IRS) must meet when the IRS asserts a willful failure to file penalty for the Report of Foreign Bank and Financial Accounts (FBAR). At issue is whether the IRS must meet a clear and convincing evidence standard to establish willfulness or whether the appropriate measure is the lower preponderance of the evidence level of proof.

The District Court’s dismissed the initial suit for lack of standing. A group of taxpayers filed an amici curiae brief with the Fifth Circuit urging the Court to reverse the District Court’s decision due to the perceived harm that the uncertainty of the burden of proof could cause taxpayers who made an error in failing to file the FBAR, but who believe their oversight was not willful. This comes at a time when an unprecedented number of District Court cases will be filed for FBAR violations due to the inability of many taxpayers to achieve relief through the IRS Appeals process.

IRS Seeks to Speed Up FATCA Reporting with Imposition of Year End Deadline to Finalize IGAs

The Foreign Account Tax Compliance Act (“FATCA”) was enacted in 2010 by Congress to target non-compliance by U.S. taxpayers using foreign accounts. FATCA requires foreign financial institutions (FFIs) to report to the Internal Revenue Service (“IRS”) information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.   FATCA obliges all U.S. paying agents to withhold tax, at a rate of 30 per cent, from payments of U.S. source income to non-U.S. persons who are classified as FFIs unless that FFI is located in a country which has entered into an intergovernmental agreement (“IGA”) with the IRS to report information on relevant account holders to the IRS.

An IGA is a bilateral agreement with the U.S. to simplify reporting compliance and avoid FATCA withholding. Under a Model 1 IGA, FFIs in partner jurisdictions report information on U.S. account holders to their national tax authorities, which in turn will provide this information to the IRS. Under a Model 2 IGA, FFIs report account information directly to the IRS.

Since the implementation of FATCA, the IRS has permitted numerous jurisdictions to benefit from having status as IGA, even if they did not have a finalized IGA in force. Notice 2013-43 (2013-31 I.R.B.113) provided that a jurisdiction that had signed but not yet brought into force an IGA was treated as if it had an IGA in effect as long as the jurisdiction was taking the steps necessary to bring the IGA into force within a reasonable period of time. Announcement 2014-17 (2014-18 I.R.B. 1001) and Announcement 2014-38 (2014-51 I.R.B. 951) provided that jurisdictions treated as if they have an IGA in effect also include jurisdictions that, before November 30, 2014, had reached an agreement in substance with the United States on the terms of an IGA as long as the jurisdiction continued to demonstrate firm resolve to sign the IGA as soon as possible. Notice 2015-66 (2015-41 I.R.B. 541) announced that FFIs in partner jurisdictions with a signed or “agreed in substance” Model 1 IGA that had not entered into force as of September 30, 2015, would continue to be treated as complying with, and not subject to withholding under, FATCA so long as the partner jurisdiction continued to demonstrate firm resolve to bring the IGA into force and any information that would have been reportable under the IGA on September 30, 2015, is exchanged by September 30, 2016, together with any information that is reportable under the IGA on September 30, 2016.

In Announcement 2016-17, however, the IRS pressures jurisdictions that have been lagging on this process to substantially complete it by year-end, or risk their FFIs to be subject to the 30 percent withholding in coming years. Specifically, the Announcement provides that, on January 1, 2017, Treasury will begin updating the IGA List to provide that certain jurisdictions that have not brought their IGA into force will no longer be treated as if they have an IGA in effect. Each jurisdiction with an IGA that is not yet in force and that wishes to continue to be treated as having an IGA in effect must provide to Treasury by December 31, 2016, a detailed explanation of why the jurisdiction has not yet brought the IGA into force and a step-by-step plan that the jurisdiction intends to follow in order to sign the IGA (if it has not yet been signed) and bring the IGA into force, including expected dates for achieving each step. In evaluating whether a jurisdiction will continue to be treated as if it has an IGA in effect, Treasury will consider whether: (1) the jurisdiction has submitted the explanation and plan (with dates) described above; and (2) that explanation and plan, as well as the jurisdiction’s prior course of conduct in connection with IGA discussions, show that the jurisdiction continues to demonstrate firm resolve to bring its IGA into force.

This Announcement reflects the IRS’s eagerness to gather information on U.S.-owned bank accounts in foreign jurisdictions, which has been repeatedly delayed due to the complexities that arose in the implementation of FATCA. The risk of the substantial withholding tax under FATCA for FFIs in non-IGA jurisdictions may incentivize lagging jurisdictions to speed the process along.

The Streamline Program Turns Two

The Streamlined Filing Compliance Procedure (SFCP) is now two years old. The SFCP was designed for taxpayers whose failure to disclose their offshore accounts was “non-willful,” due to a lack of understanding or knowledge of reporting requirements for U.S. persons. Unlike the full blown Offshore Voluntary Disclosure Program (“OVDP”), the SFCP places the burden of proving that the taxpayer’s noncompliance was willful on the IRS once the taxpayer has asserted that their non-compliance was not willful. Taxpayers who’s tax returns and informational filing requirements satisfy the SFCP are only required to file tax returns for the previous 3 years and FBAR’s for the previous 6 years while taxpayers in the OVDP must file tax and information returns and FBAR’s for the previous eight years.

One point of contention for taxpayers who entered into the OVDP before the SFCP was introduced in 2014, and whose noncompliance would have qualified them for the SFCP, is that they should be able to switch to the SFCP and take advantage of the reduced penalties on the income tax liability and file only 3 years of income tax returns. While the reduced miscellaneous penalty is available under the OVDP by requesting transitional relief, such relief is not guaranteed and often denied.

Recently, a group of taxpayers brought suit in the Washington D.C. District Court to challenge the IRS’s position that taxpayers who were enlisted in the OVDP prior to the implementation of the SFCP, cannot have their matter transferred to the SFCP. The taxpayers in this case contend they were being treated unfairly under this system as they were no different than those who came forward later in time and entered the SFCP.

Unfortunately, the court did not decide the merits of the case. Rather, the court held that the suit hinders the IRS’s ability to make decisions regarding the enforcement of tax liabilities and dismissed the suit as being barred under the Tax Anti-Injunction Act (26 U.S.C. § 7421), which prohibits suits that restrain the assessment and collection of taxes.   This case highlights the difficulties that can arise when the Service creates settlement programs independent from regulatory oversight and commentary.

Is the Yates Memo Impacting Internal Investigations? The Importance of Individual Representation

Since it’s release more than ten months ago, the so-called Yates Memo has stirred up its fair share of commentary. The memo, which requires prosecutors to pursue – and companies seeking cooperation credit to identify – individual bad actors, generated concern that the new requirement would make investigations more difficult and even discourage companies from cooperating at all. Now that the Yates Memo is coming out of its infancy, some report that employees are more nervous about cooperating with corporate counsel, and requesting personal legal representation much earlier in the process, such that investigations are, in fact, becoming more challenging and more costly. Others, however, report seeing less of an impact and do not perceive the Yate Memo as (at least as of yet) having had the dire consequences that were feared.

Even with this divide, there seems to be agreement on at least one thing: the Yates Memo has highlighted – and perhaps increased – the need of individual representation in corporate investigations. Cooperation of in-house employees is important to corporate counsel’s ability to conduct a thorough and objective investigation. Since the Yates Memo, companies and their employees are more aware of and sensitive to the possibility that prosecutors will pursue individuals suspected of wrongdoing. It is a tense dynamic, but one that can be allayed by providing employees with individual representation. This has long been a good practice of companies and their corporate counsel, and while it does increase costs, in a post-Yates Memo world, it can go along way toward reassuring employees that their personal interests are being taken into account and foster internal cooperation that will, in turn, help the company pursue its goals.

Tax Court Finds Predictive Coding Satisfies Reasonable Inquiry Standard for Responding to Discovery Requests

The Tax Court recently denied the Internal Revenue Service’s (“IRS”) motion to compel the production of electronically stored information by Petitioner, Dynamo Holding Limited Partnership, which was not delivered as part of a discovery response based on the mutually agreed-upon use of “predictive coding.” Dynamo holdings, Ltd. v. Comm’r, Docket Nos. 2685-11, 8393-12. Predictive coding is an electronic discovery method that involves the use of keyword search, filtering and sampling to automate portions of an e-discovery document review. This method attempts to reduce the number of irrelevant and non-responsive documents that need to be reviewed manually.

The IRS and Petitioners had agreed that Petitioners would run a search for terms determined by the IRS on the potentially relevant documents. Petitioners used the predictive coding model to provide the IRS with a selection of documents that the model determined to be relevant.

The IRS, believing the response to be incomplete, served Petitioners with a new discovery request asking for all documents containing any of a series of search terms under a simple keyword or Boolean search, speculating that these documents were “highly likely to be relevant.”   Petitioners objected to this new discovery request as duplicative of the previous discovery responses made through the use of predictive coding. Petitioners contended that the predictive coding algorithm worked correctly, and that the 765 documents excluded as not relevant by the predictive coding algorithm, were properly excluded because they were outside the relevant time frame or otherwise are not relevant. The IRS thereafter filed a motion to compel the production of these documents.

The Tax Court denied the motion, asserting that it was predicated on two myths. The first of these stated myths was the “myth of human review” that “manual review by humans of large amounts of information is as accurate and complete as possible – perhaps even perfect – and constitutes the gold standard by which all searches should be measured.” The second myth was “the myth of a perfect response,” which is beyond the requirements of the Tax Court Rules. The Tax Court found that that the Tax Court Rules and the Federal Rules of Civil Procedure require only that the responding party make a “reasonable inquiry” when making a discovery response. The court explained that “when the responding party is signing the response to a discovery demand, he is not certifying that he turned over everything, he is certifying that he made a reasonable inquiry and to the best of his knowledge, his response is complete.”  As this standard was satisfied by Petitioners in their utilization of predictive coding to locate the relevant documents, the IRS’s attempt to expand e-discovery beyond the agreed upon predictive coding was unsuccessful.

House Ways and Means Wants Probable Cause Before Seizure

The Internal Revenue Service (IRS) has come under scrutiny recently for seizing assets that the IRS claims were the subject of structuring violations. Structuring is the practice of consistently making cash deposits and/or withdrawals of less than $10,000 to avoid mandatory reporting requirements (filing a form 8300), a large part of which were put in place to prevent money laundering and tax evasion. Prior to a policy change in 2014, the IRS was seizing funds that they believed were the subject of structuring violations whether or not the IRS knew that the funds were coming from a legal or an illegal source.

Recent hearings conducted by the House Ways and Means Committee have shown that there are more than 600 cases of the government seizing legally sourced funds prior to the 2014 policy shift and frozen assets involved in these 600 cases yet to be returned to the taxpayers.

As a result of the Committee hearings, legislation has been introduced that would require the IRS to establish probable cause to show that the source of funds involved in a structuring scheme originated from an illegal source before the funds could be seized.   Under the proposed legislation, the IRS would be required, in most cases, to give 30 days of pre-seizure notice and hold a post-seizure hearing within 30 days of the notice.   Additionally, as a bonus, any interest that accrues on the wrongly seized funds will be exempt from income tax. The proposed legislation was scheduled for a mark up by the House Ways and Means Committee on July 7, 2016.

Next Up: Singapore? Summonses Could Hit More Global Financial Institutions

A recent summons showdown with UBS shows that DOJ and the IRS are far from done with offshore enforcement efforts, and are expanding those efforts beyond Europe Among the most likely of new targets is Singapore, and since there is no Tax Information Exchange Agreement (TIEA) or other tax treaty between the United States and Singapore, foreign financial institutions could see IRS summonses being served on their U.S. branches.

Such summonses often are referred to as Bank of Nova Scotia summons. In the recent case involving UBS, the IRS served a third-party summons on a branch of UBS AG in the United States seeking records for an account at UBS in Singapore held by a U.S. citizen living in Hong Kong UBS refused to turn over the records on grounds that Singapore’s bank secrecy laws prohibited disclosure without permission from the accountholder. The IRS sought to enforce the summons in federal court – and the case was teed up for litigation – until the accountholder consented to release of the records and UBS complied with the summons. The IRS thereafter withdrew the enforcement action.

We cannot know whether UBS or the government ultimately would have won the day in court. Many factors are taken into consideration in such enforcement actions, and past cases have had varied results. What we do know is that the government maintains the summons served on UBS was enforceable, and was willing to go the distance. With Singapore – and potentially other jurisdictions without TIEA’s or tax treaties – on the enforcement horizon, more global financial institutions are likely to see IRS summonses coming their way.

IRS on Alert of Partners Attempting to Slip Through the Cracks Before New Partnership Audit Regime Takes Effect

Despite the significant uncertainty surrounding the new partnership audit regime implemented under the 2015 Bipartisan Budget Act (Pub. L. No. 114-74) (“BBA”), the IRS expressed its intention to watch for partners exiting partnerships to avoid tax, during a District of Columbia Bar event on June 23, 2016.

The new rules, effective in 2018, require partnership-level audits of large partnerships, and make it simpler for IRS examiners to undertake an audit because the system will be able to calculate and collect adjustments at the partnership level.   Since there can be several years between when a return is filed and when an audit adjustment is levied, however, it leads to the possibility that partners could sell their interest before the commencement of an audit and avoid adjustments that may have been attributable to them.

Although the panel suggested amending partnership agreements so that partners who sell their interests would still be on the hook for any tax due later, it is unclear whether partners intending on exiting partnerships in light of the new rules would agree to such an amendment. Further, because of the vast uncertainty regarding various areas of the partnership audit rules, most partnerships are not amending their agreements at this time.

The IRS intends to issue regulations with an effective date of January 1, 2018, which would address the scope of the rules and how statute of limitations are applied in this context.   Many areas of uncertainty with the new rules, however, have not yet been addressed by the IRS.

One major area of uncertainty revolves around the “partnership representative,” which is an expanded version of the “tax matters partner” role under prior law. The partnership representative, which is not required to be a partner, will have sole authority to act on behalf of the partnership in an audit proceeding, and will bind both the partnership and the partners by its actions in the audit. The IRS no longer will be required to notify partners of partnership audit proceedings or adjustments, and partners will be bound by determinations made at the partnership level.

It appears that partners neither will have rights to participate in partnership audits or related judicial proceedings, nor standing to bring a judicial action if the partnership representative does not challenge an assessment. Accordingly, the partnership representative is vested with significant responsibility and power under the BBA, and would likely need to devote the majority of his or her time addressing these issues. This raises the possibility that certain individuals might be compensated for this role, and the role might be limited by the provisions of the partnership agreement. At the very least, there should be provisions in place to have a degree of control over elections made at the entity level, or final determinations at the entity level.

Another noteworthy area of concern is how the new rules would impact State tax filings. States have not yet reacted to the new rules, and thus, partners may be reluctant to make amendments until they are aware of both the state and federal implications of the audit rules. The IRS expects to issue guidance in stages to alleviate some of the concerns expressed by practitioners and allow them to move forward with amendments to partnership agreements.

Notwithstanding the uncertainty, it is clear that the IRS is watching for those seeking to take advantage of the new regime to avoid tax.

U.S. Country-by-Country Reporting Coming Sooner Than Anticipated – Though Possibility of Local Filing Requirements During “Gap” Period Remains

The Department of Treasury has announced that it plans to finalize its rules on country-by-country reporting by June 30, 2016 – just in time for U.S. companies with tax years beginning in the latter half of the year to start reporting.  Covered U.S. companies meeting the reporting threshold will have to start filing reports for tax years beginning after June 30th, including years beginning on July 1, 2016, and years beginning on September 1, 2016.

With the announcement came urging for other countries to be flexible in their local reporting requirements.  Many countries already have implemented country-by-country reporting.  Others, like the United States, have been slower to do so.  The effect of such staggered implementation for multinational corporations based is that, until their home countries begin to require reporting, their subsidiaries may be subject to local reporting requirements in other countries that have implemented reporting requirements.

Generally, country-by-country reporting obligations fall on parent companies in their country of residence, and not on subsidiary companies, but where a parent company’s home country does not require reporting, its subsidiaries can be required to file local reports in their countries of residence.  Because of this, the possibility that the United States would not have reporting requirements until 2017 had raised concern among U.S. multinational corporations that, during the “gap” period, their subsidiaries could be subject to myriad local reporting requirements in multiple jurisdictions.

Although the announcement of earlier implementation in the United States will help to curb the “gap” problem for U.S. multinationals, the issue remains.The United States is not the only country dealing with the issue of staggered implementation.  Canada has not yet passed any implementing legislation, and Japan will first start requiring reporting for tax years beginning on or after April 1, 2016.

For questions regarding BEPS and related matters, contact Jim Mastracchio (james.mastracchio@dentons.com); Jeff Erney (jeffry.erney@dentons.com) or Jennifer Walrath (Jennifer.walrath@dentons.com).

LB&I Introduces New Examination Process Designed to Provide Transparency and Collaboration

The Internal Revenue Service (“IRS”) Large and International Business (LB&I) has announced it will be implementing changes to its examination process, effective May 1, 2016.  LB&I’s new procedures are designed to provide an organizational approach for conducting professional examinations from the first contact with the taxpayer through the final stages of issue resolution.  By adopting these procedures, the IRS hopes to add efficiency to the examination process and permits the taxpayer and the examination team to work together in “the spirit of cooperation, responsiveness, and transparency.” Under the new procedures, the examination will be divided into three phases: planning, execution, and resolution, each of which focus on achieving certain specified goals.

The planning phase is focused upon identifying specific issues in the taxpayer’s case.  Once issues are identified, the exam team will explain to the taxpayer why each issue is being considered.  Thereafter, an issue team, comprising LB&I employees most familiar with the particular issue, will work with the taxpayer to establish the relevant facts.  Although a case manager will have overall responsibility for the case, each issue will have a designated manager who oversees the planning, execution and resolution of the issue.

During the execution phase, the issue teams will fully develop their particular issue, including determining the facts, applying the law to those facts, and understanding the various tax implications of the issue.  This process will include interactive discussions with the taxpayer followed by the issuance of Information Document Requests (IDRs) to develop the facts.  The new procedures note that a meaningful discussion with the taxpayer prior to issuing an IDR will result in a more effective process.  After gathering relevant facts, the issue team will document the agreed facts and obtain acknowledgement from the taxpayer with respect to the unagreed facts.

Finally, in the resolution phase, LB&I encourages its employees to use all available tools to resolve issues.  As facts have been fully developed and documented in the execution phase, the taxpayer and the issue team will be able to work more productively in the resolution stage.  Although there are numerous strategies to work towards resolution, LB&I requires its employees to consider Fast Track Settlement for all unagreed issues.  Fast Track consists of a mediation where the taxpayer, the issue team and Appeals must agree to participate and agree to a mutual resolution.   The goal of the resolution phase is tax certainty for both the taxpayer and LB&I.  Thus, at the conclusion of the resolution phase, taxpayers and LB&I may be asked to perform a joint critique of the exam process and recommend improvements.

LB&I emphasizes the significance of bringing all information to light as soon as possible to avoid issues relating to the expiration of the statute of limitations, or the possibility of new information coming to light during the Appeals process, which would return the case to Examination.  This policy is reflected in LB&I’s request that taxpayer’s bring any potential refund claim to the exam team’s attention as soon as possible.  LB&I specifically indicated it would only accept informal claims that are provided to the exam team within 30 calendar days of the opening conference.  If such claims are brought within that time period, they can be developed and processed by exam, providing higher possibilities for tax certainty for both the taxpayer & LB&I.  Refund claims submitted within this time period must meet the standards of Treas. Reg. § 301.6402-2, which provides that a valid claim must set forth in detail each ground upon which credit or refund is claimed, present facts sufficient to apprise the IRS of the exact basis for the claim, and contain a written declaration that it is made under penalties of perjury.   However, in the interest of incentivizing taxpayer’s to bring refund claims forward in a timely manner, LB&I has indicated it will discuss deficiencies not meeting the Treasury Regulations and provide the taxpayer an opportunity to correct the deficiencies.  If refund claims are not brought within the specified 30 days, they must be filed using the applicable amended tax return or Form 843, Claim for Refund and Request for Abatement.

The reorganization of the LB&I examination process reflects the IRS’s desire to achieve fair and final resolutions during the Examination Process that is achieved with an issue specific approach, involving issue teams that are well versed on the facts to fully develop the facts relevant to each issue.  Notably, Publication 5125 mentions the significance of meaningful discussions with the taxpayer on numerous occasions, including conversations to ensure the taxpayer fully understands the issues are identified, conversations prior to issuing IDRs, and acknowledgements of agreed and unagreed issues.  Upon its implementation, the IRS hopes the new examination process will allow LB&I to work transparently in a collaborative manner with the taxpayer to understand their business and share the issues that have been identified for examination.  This, in turn, should lead to LB&I’s ultimate goal of increasing the final resolutions reached during the exam process.

Please contact Jeffry Erney (jeffry.erney@dentons.com) or Sunny Dhaliwal (sunny.dhaliwal@dentons.com).

FinCEN Seeks to Renew Information Sharing Requirements for U.S. Financial Institutions

The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) is seeking comments regarding the renewal of its program for information sharing between government agencies and financial institutions.

Under the program, U.S. and certain foreign law enforcement agencies can ask FinCEN to request of U.S. financial institutions information concerning any person or entity an agency certifies is engaged in or suspected, based on credible evidence, of engaging in terrorist activity or money laundering.  Foreign agencies can participate in the program only if they are in a jurisdiction that allows the United States reciprocal access to comparable information.  FinCEN sends approved requests to relevant U.S. financial institutions, which then must “expeditiously” search their records to determine whether they have maintained an account or conducted any transaction with the individual or entity identified in the inquiry and report back to FinCEN regarding any such transaction or account.

Approximately 20,134 financial institutions are covered by the program.  FinCEN estimates that that there are 90 requests per year, each usually concerning multiple subjects.  Of the 90 requests, 10 are from FinCEN on its own behalf, 50 are from U.S. state and local law enforcement, and 30 are from European Union countries approved by treaty.

For questions regarding FINCEN filings, please reach Jim Mastracchio (james.mastracchio@dentons.com) or Jennifer Walrath (jennifer.walrath@dentons.com).