Thursday, July 24, 2014

Part 4–THE DELINQUENT INTERNATIONAL RETURN SUBMISSION PROCEDURES

Below is Part 4 of my partner, Rick Josepher’s, analysis of the new offshore enforcement environment in light of the new 2014 Offshore Voluntary Disclosure Procedures. To view this Part, and all prior parts, in PDF format (which will be easier to read and save given the length and formatting of these articles), click on the following links:

INTRODUCTION

Part I - THE 2014 OVDP

Part II - THE STREAMLINED FILLING COMPLIANCE PROCEDURES

Part III – THE DELINQUENT FBAR SUBMISSION PROCEDURES

Part IV - THE DELINQUENT INTERNATIONAL RETURN SUBMISSION PROCEDURES

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IV.      The “Delinquent International Information Return Submission Procedures.” The new procedures for filing delinquent international returns where there is no unpaid tax are no longer a part of OVDP FAQ 18, as set forth above. Instead, the New International Information Return Submission Procedures are set out as a separate submission procedure.


            A.        The Delinquent International Information Return Submission Procedures. The Delinquent International Information Return Submission Procedures are described as follows (http://www.irs.gov/Individuals/International-Taxpayers/Delinquent-FBAR-Submission-Procedures):


            “Delinquent International Information Return Submission Procedures”

 

Taxpayers who do not need to use the OVDP (described in section 1 above) or the Streamlined Filing Compliance Procedures (set forth in section 2 above) to file delinquent or amended tax returns to report and pay additional tax, but who:

 

(1) have not filed one or more required international information returns,

 

(2) have reasonable cause for not timely filing the information returns,

 

(3) are not under a civil examination or a criminal investigation by the IRS, and

 

(4) have not already been contacted by the IRS about the delinquent information returns should file the delinquent information returns with a statement of all facts establishing reasonable cause for the failure to file. As part of the reasonable cause statement, taxpayers must also certify that any entity for which the information returns are being filed was not engaged in tax evasion. If a reasonable cause statement is not attached to each delinquent information return filed, penalties may be assessed in accordance with existing procedures.

 

All delinquent international information returns other than Forms 3520 and 3520-A should be attached to an amended return and filed according to the applicable instructions for the amended return. All delinquent Forms 3520 and 3520-A should be filed according to the applicable instructions for those forms. A reasonable cause statement must be attached to each delinquent information return filed for which reasonable cause is being requested.

 

Information returns filed with amended returns will not be automatically subject to audit but may be selected for audit through the existing audit selection processes that are in place for any tax or information returns.”


            B. Delinquent Informational Return Procedures Compared to 2012 Submissions Under FAQ 18.


                        1.         Similarities. Similar to the comments regarding the late FBAR submissions compared to 2012 FAQ 17 procedures, the New Procedures expressly state that information return submitted thereunder “may be selected for audit” whereas under 2012 FAQ 18, they apparently were not-at least the FAQ didn’t mention the possibility whereas possibility of examination is now highlighted.


                        2.         Different From 2012 FAQ 18 No Assurance of No Penalties and Evasion Certification Required.


                                    A. No assurance of no late filing penalty. The New Procedures do make no representations that the IRS will not impose a late filing penalty under these procedures. This is unlike the 2012 procedures under 2012 FAQ 18 which expressly provided that the IRS would not impose a late filing penalty if no tax liabilities were under-reported. Therefore, if the filing is examined the IRS could impose a late filing penalty or other penalties. These procedures are wholly without assurances to taxpayers submitting under them. Consider the following from 2012 FAX 18, which is not anywhere in the New Procedures:


            2012 FAQ 18: (reads in part as follows):

 

“The IRS will not impose a penalty for the failure to file the delinquent Forms 5471 and 3520 if there are no under-reported tax liabilities and you have not previously been contacted regarding an income tax examination or a request for delinquent returns.”

 

The above assurances are not contained under the New Procedures for Delinquent Offshore International Returns!


                                    B. Statements of Reasonable Cause and No Evasion. The new procedures require:


                                                1.         Reasonable cause statement as follows: “..a statement of all facts establishing reasonable cause for the failure to file.


                                                2.         Statement of “no evasion” as follows: As part of the reasonable cause statement, taxpayers must also certify that “any entity for which the information returns are being filed was not engaged in tax evasion.” Although not in the New Procedures, but apparently explaining this “no evasion” requirement, is the following example from “Tax Havens: International Tax Avoidance and Evasion,” Jane G. Gravelle, Senior Specialist in Economic Policy, Jan. 23, 2013:

 

“A typical way that U.S. individuals can easily evade tax on domestic income through a Cayman Islands operation with little expense using current technology. The individual, using the Internet, can open a bank account in the name of a Cayman corporation that can be set up for a minimal fee. Money can be electronically transferred without any reporting to tax authorities, and investments can be made in the United States or abroad. Investments by non-residents in interest bearing assets and most capital gains are not subject to a withholding tax in the United States.”

 

In the foregoing example, arguably, any omitted income would be omitted U.S. income of the individual such that filing arguably qualified for former FAQ 18. Alternatively, in the absence of a “no evasion” certification, the filing seemingly qualified for the prior OVDP’s no-penalty delinquent information return procedures, since the entity created would not have had offshore income omitted. In any event, the intent of the IRS is clear: offshore entities are suspect and the IRS wants full disclosure so that evaders of income come into compliance under the OVDP and not through the other voluntary disclosure procedures.


            C.        Conclusion As to Delinquent International Information Return Submission Procedures. Unlike the 2012 OVDP FAQ 18, under the New Delinquent International Information Return Procedures, there are no assurances that the failure to file delinquent international returns will be permitted without imposition of penalties if the IRS examines the submission, even where all tax liabilities have been reported. Further, submissions won’t qualify under the New Procedures, if the taxpayer is under an IRS examination, civil or criminal, or if the IRS finds that the entities were used for tax evasion.


            Although the New Delinquent International Information Return Procedures provide no assurances that penalties won’t be imposed if the submissions are examined by the IRS, hopefully filings under the procedures won’t result in penalties being automatically imposed as long as the “reasonable cause” statement is enclosed, the filing is timely, there is no tax evasion, and the submission otherwise qualifies under the procedures.


            Submissions do not qualify for the New Delinquent Information Return Procedures: (1) if there are unreported tax liabilities related to the offshore entity, (2) if there is an ongoing IRS exam concerning the taxpayer or the offshore entity, or (3) if the entity was used for “tax evasion.”


            As under the Streamlined and Delinquent FBAR New Procedures, non-qualifying submissions under the Delinquent Information Return Procedures are subject to civil and criminal penalties. Therefore, taxpayers should not file under the Delinquent Information Return Procedures without first assuring they qualify. They should carefully consider their “reasonable cause” statements, make sure that “evasion” or some kind of scheme or trickery is explained or non-existent, and should be certain that there are no unpaid tax liabilities related to the offshore entity.

 

          Taxpayers who are not certain whether they will qualify under the New International Offshore Information Return Procedures, should consider filing pursuant to the Streamlined Procedures, the OVDP, or under the voluntary disclosure procedures in IRM 9.5.11., as discussed in Part V herein.

Friday, July 18, 2014

APPLICABLE FEDERAL RATES–AUGUST 2014

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Thursday, July 17, 2014

Part 3 – THE DELINQUENT FBAR SUBMISSION PROCEDURES

Below is Part 3 of my partner, Rick Josepher’s, analysis of the new offshore enforcement environment in light of the new 2014 Offshore Voluntary Disclosure Procedures. To view this Part, and all prior parts, in PDF format (which will be easier to read and save given the length and formatting of these articles), click on the following links:

 

INTRODUCTION

Part I - THE 2014 OVDP

Part II - THE STREAMLINED FILLING COMPLIANCE PROCEDURES

Part III – THE DELINQUENT FBAR SUBMISSION PROCEDURES

 

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  THE  IRS’ NEW 2014 OFFSHORE VOLUNTARY DISCLOSURE PROCEDURES ANALYZED IN THE NEW OFFSHORE ENFORCEMENT ENVIRONMENT

 

PARTS III AND IV:
THE “DELINQUENT FBAR SUBMISSION PROCEDURES,” (PART III); AND
THE “DELINQUENT INTERNATIONAL INFORMATION RETURN SUBMISSION PROCEDURES” (PART IV)

 

    On June 18, 2014, the Internal Revenue Service (the “IRS” or “Service”)  announced “major changes” to its offshore voluntary compliance programs. They include “four distinct options” for addressing prior offshore non-compliance. See, http://www.irs.gov/Individuals/International -Taxpayers/Options-Available-For-U-S-Taxpayers-with-Undisclosed-Foreign-Financial-Assets.

 

     The Introduction to this article can be found in the July 5, 2014 posting in Rubin On Tax. In the Introduction, the New Procedures are described. They clearly were intended to bring about significant changes in the offshore compliance process. As discussed in the Introduction, the Streamlined Procedures were intended to remove those who did not commit criminal offshore violations from the OVDP. The burden on the IRS processing of offshore submissions would be lessened as civil violations would not be filed and, rather than review each one, the IRS would apply its regular audit selection process, such that it could accommodate the filings without undue burden on the IRS or taxpayers who wanted to come into compliance and weren’t “criminals” in any common sense of the word.  Since “willful” violations remain undefined by the IRS, there is a gaping hole in the New Procedures and the OVDP continues to be the only avenue available which offers certainty.

 

    Part I to this Article was posted in this blog on July 9, 2014.  At Part I, the 2014 OVDP, is analyzed through  review of the substantive as well as the more technical revisions, modifications clarifications to the new 2012 FAQ which now are a part of the 2014 FAQ for the 2014 OVDP.

 

    Part II to this Article was posted in this blog on July 14, 2014. At Part II, the new Streamlined Procedures are analyzed.

 

    Parts III and IV, the new “Delinquent FBAR Submission Procedures,” and  “Delinquent International Information Return Submission Procedures” follow.

 

III.    The “Delinquent FBAR Submission Procedures.” The New Procedures for filing delinquent FBARs where there is no omission of offshore taxable income are no longer a part of OVDP FAQ 17, as set forth above. Instead, the filing of delinquent FBARs is set out as a separate submission procedure.


            A.        Delinquent FBAR Submission Procedures. The Delinquent FBAR Procedures are described as follows (See http://www.irs.gov/Individuals/International-Taxpayers/Delinquent-FBAR-submission-Procedures):


            Delinquent FBAR Submission Procedures

 

Taxpayers who do not need to use either the OVDP... or the Streamlined Filing Compliance Procedures...to file delinquent or amended tax returns to report and pay additional tax, but who:

 

(1) have not filed a required Report of Foreign Bank and Financial Accounts (FBAR) (FinCEN Form 114, previously Form TD F 90-22.1),

 

(2) are not under a civil examination or a criminal investigation by the IRS, and

 

(3) have not already been contacted by the IRS about the delinquent FBARs should file the delinquent FBARs according to the FBAR instructions and include a statement explaining why the FBARs are filed late. All FBARs are required to be filed electronically at FinCen. On the cover page of the electronic form, select the reason for filing late....”

 

The IRS will not impose a penalty for the failure to file the delinquent FBARs if you properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.

 

FBARs will not be automatically subject to audit but may be selected for audit through the existing audit selection processes that are in place for any tax or information returns.”


            B.      Delinquent FBAR procedures Compared to 2012 Submissions Under FAQ 17.


            The New Procedures expressly state that FBARs submitted pursuant to the New Procedures “may be selected for audit” whereas under 2012 FAQ 17, the IRS did not mention audits or examinations. Whether there is a meaningful difference is not clear, because under the New Procedures as under the prior procedures, if there are are no under-reported tax liabilities and if the taxpayer has not been contacted by the IRS regarding delinquent returns, there will be no penalties–whether or not an examination is conducted.


            C.        Further thoughts as to Impact of Filing Delinquent FBARS Under New Procedures. As with the procedures under 2012 FAQ 17, the reason for the late filing is required; however, only recently has the FinCen Form 114 contained a line which requests the reason for the late filing. (FinCen Form 114, is the electronic FBAR form which has replaced the FBAR, Form90.22-11 and which must be submitted). Since any omission of income will negate the qualification for submission under the New Procedures, it is important that the “reason for late filing” be considered carefully since any “willful” omission would require penalties to be considered under the “willful” standard, outside of the OVDP and outside of the Streamlined Procedures.


                        1.         FinCen Form 114 Reasons for Late Filing. Form 114 requests reasons for the late filing, and provides the following reasons to select from:


                                    “1. Did not know that I had to file.

2. Thought account balance was below reporting threshold.

3. Did not know my account qualifies as foreign.

4. Account statement not received in time.

5. Account statement lost (replacement requested).

6. Late receiving missing required account information.

                                    7. Unable to obtain joint spouse signature in time. 

8. Unable to access BSA E-filing system.

9. Other (Please provide explanation).”


                        2.      Thoughts on Reasonable Cause Statement. The late filing reasons provided on the Fincen electronic form all are reasons which seemingly could fall into a category of “non-willful” or “willful” depending upon the definition of each. See discussion herein in Part VI. Therefore, any explanation for the late filing should be considered carefully, as if omitted income is later discovered or if the IRS can reject a filing on examination of the submission if it disagrees with the reasonable cause statement, then penalties could apply and the taxpayer would have to contest them.


            D.        Conclusion As to Delinquent FBAR Submission Procedures. A submission will not qualify for the Delinquent FBAR filing procedures if : (1) there was any omission of income from the offshore account (even one ($1.0) dollar) or, (2) if there is an ongoing IRS civil or criminal exam.


             Unlike under 2012 OVDP FAQ 17 regarding delinquent FBAR procedures, the New Delinquent FBAR Procedures do not provide an assurance that submissions thereunder will not result in penalties even if there has been no omitted taxable income from the accounts for which FBARs weren’t filed. Rather, the Delinquent FBAR procedures make it clear that if a delinquent FBAR submission is examined by the IRS, civil FBAR penalties and even criminal prosecution may result.


            As a result, taxpayers considering filing under the New Delinquent FBAR procedures should consider obtaining a “pre-clearance” from Criminal Investigation to assure that they are not under examination and are therefore eligible to so file.


            Taxpayers should carefully consider their “reasonable cause” for late filing statement since it may be important if an examination results.


              Finally, for taxpayers who are not certain whether they have omitted income from their offshore accounts, rather than taking a chance that they qualify under the New Delinquent FBAR procedures, they should consider filing pursuant to the Streamlined Procedures, the OVDP, or under the voluntary disclosure procedures in IRM 9.5.11., as discussed in Part V herein.