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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.

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.

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).

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.

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.

Are You Ready for FATCA?

July 1, 2014, marks the date when withholding under the US Foreign Account Tax Compliance Act (FATCA) first begins to apply. Aimed at addressing perceived tax evasion and avoidance by US persons through the use of offshore accounts, FATCA has a wide-ranging impact on non-US entities that receive, directly or indirectly, many types of US-source income. Additionally, US entities that make payments of many types of US-source income to non-US persons are also affected by the new rules.

In the video interview, Tax partner John Harrington, former international tax counsel for the Department of Treasury, provides an overview of FATCA. In the video, John explains why companies should be actively preparing for the new compliance provisions, even if 2014 and 2015 are considered a “transition period” by the IRS. More specifically, he examines:

  • The broad impact of FATCA and intergovernmental agreements (IGAs);
  • The importance of planning for FATCA’s series of compliance deadlines; and
  • New reporting requirements and expectations under the global information automatic exchange.

US Treasury Releases Substantial FATCA Guidance

Continuing its implementation of the Foreign Account Tax Compliance Act (FATCA), the US Treasury Department recently released a package of proposed and temporary regulations.

According to a fact sheet released by the US Treasury Department along with a preliminary version of the temporary regulations on February 20, 2014, this is “the last substantial package of regulations necessary to implement [FATCA].”

Dentons’ tax lawyers analyze the latest on FATCA in this article.

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US Treasury Department Releases Latest Round of FATCA Guidance

Notice 2013-69, released on October 29, 2013, is the latest effort by the US Treasury Department to provide guidance to US and foreign entities that will be subject to the new reporting and withholding rules imposed by the so-called Foreign Account Tax Compliance Act, or “FATCA.” For information on previous guidance issued by the US Treasury Department and background on FATCA, please see our previous alerts titled US Government Announces 6-Month Delay in Certain FATCA Rules and US Issues Final FATCA Regulations.

Notice 2013-69 basically does three things:

  1. publishes the draft Foreign Financial Institution (“FFI”) agreement with which participating FFIs and Model 2 FFIs must comply,
  2. provides updated information about the responsibilities of participating FFIs and Reporting Model 2 FFIs and the FATCA registration process, and
  3. announces the intent to make limited changes to the recently issued FATCA regulations and to other reporting regulations to coordinate with FATCA reporting.

Read more

Jerome Walker, a member of Dentons’ Corporate practice, co-authored this article.

US Government Announces 6-Month Delay in Certain FATCA Rules

Recognizing the practical and logistical problems faced by US withholding agents and foreign financial institutions (“FFIs”), and the uncertainty faced by many FFIs and foreign governments about whether an intergovernmental agreement (“IGA”) will be in effect by January 1, 2014, US tax authorities on July 12, 2013, issued Notice 2013-43. Notice 2013-43 states that the US Treasury Department and US Internal Revenue Service (“IRS”) will postpone by six months, to July 1, 2014, the start of withholding required by the so-called Foreign Account Tax Compliance Act, or “FATCA,” and make corresponding adjustments to various other time frames provided in the final regulations. The Notice states that its goal is to allow for a more orderly implementation of FATCA. The Notice gives affected entities more time to adjust to FATCA; it generally does not, however, relax the long-term, substantive withholding and reporting obligations imposed by FATCA.

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Jerome Walker, a member of Dentons’ Corporate practice, co-authored this article.

US Issues Final FATCA Regulations

On January 17, 2013, the US Treasury Department (IRS) released final regulations to implement the US reporting and withholding rules originally enacted in 2010 and frequently referred to as the Foreign Account Tax Compliance Act, or FATCA. Beginning on January 1, 2014, the FATCA rules generally impose a 30 percent withholding tax on many types of payments of US-source income to a foreign entity (“withholdable payments”) unless the foreign entity reports certain information about any US account holders or owners it possesses. The FATCA rules apply directly to withholding agents, foreign financial institutions (FFIs) and non-financial foreign entities (NFFEs), but their indirect impact is far broader and often affects unsuspecting parties.

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Jerome Walker, a member of Dentons’ Corporate practice, co-authored this article.

IRS Updates FATCA Guidance

On October 24, 2012, the US Internal Revenue Service (“IRS”) issued Announcement 2012-42 along with a table (reproduced below) that summarizes certain Foreign Account Tax Compliance Act (“FATCA”) due diligence deadlines. The changes announced are limited, but they demonstrate that the IRS and the US Treasury Department continue to make modifications to the FATCA withholding and reporting rules in response to comments, especially comments focused on practical problems encountered by entities trying to implement and comply with FATCA.

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Jerome Walker, a member of Dentons’ Corporate practice, co-authored this article.

US Department of the Treasury Releases Proposed Regulations Implementing FATCA

On February 8, 2012, the US Department of the Treasury (the “Treasury Department”) issued detailed proposed regulations to implement the withholding and reporting rules commonly referred to as the “Foreign Account Tax Compliance Act” or “FATCA.” The proposed regulations supplement and, in some cases, modify the rules the Treasury Department previously announced in a series of notices. The release of the new rules provide an opportunity, in advance of the implementation dates, for foreign financial institutions (“FFIs”) to, among other things, determine the impact of the reporting and withholding requirements on their operations, including how much due diligence is required, whether the FFI systems must be enhanced, whether FFI records are currently readily retrieveable, whether the current number of customer files require that due diligence commence now, whether the FFI has sufficient staffing levels, whether FFI staff is sufficiently trained to implement FATCA, and whether third party assistance is required.

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Edward Hickman and Jerome Walker, members of Dentons’ Corporate practice, co-authored this article.