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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.

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.

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.

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.

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.

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.

Major Deadline Approaching to Minimize Exposure for Unclaimed Property Liability

Delaware corporations and other business entities have a limited opportunity to minimize and liquidate exposure to Delaware unclaimed property liability by enrolling in Delaware’s Voluntary Disclosure Agreement Program. The VDA program permits companies not under audit to voluntarily disclose and pay the amount of unclaimed property without interest or penalties. To obtain the maximum benefit of the VDA program—a waiver of all interest and penalties on reported property from transactions in 1996 and later, and an exclusion of property arising from transactions that took place prior to 1996—a company must enroll by June 30, 2013. An audit could otherwise subject a company to liability for transactions that took place as far back as 1981, plus interest and penalties which could double the amount due.

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Kate F. Buckley and Sara R. Werner, members of Dentons’ Corporate practice, co-authored this article.

IRS Announces Third Special Offshore Voluntary Disclosure Initiative

The Internal Revenue Service (IRS) announced on January 9, 2012 that it has reopened its voluntary disclosure initiative for the third time, in response to the US government’s continuously widening investigation of foreign banks relating to unreported offshore accounts of US persons. This third special disclosure initiative follows the IRS’s 2009 and 2011 Offshore Voluntary Disclosure Programs (OVDPs) and is available to those taxpayers who did not file in time for the 2009 or 2011 OVDPs. As in the past the OVDPs are designed to bring offshore money back into the US tax system and help individuals with undisclosed income from hidden offshore financial accounts get current with their taxes. This program allows individuals with previously unreported foreign financial accounts to significantly reduce their exposure to substantial civil tax penalties and, in many cases, to eliminate the possibility of criminal prosecution. Foreign accounts include assets held in offshore trusts, foundations, corporations and other entities.

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