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Friday, May 30, 2014


In a jury verdict this week in the Southern District of Florida, the IRS has a sharpened Sword of Damacles to hang over the head of FBAR reporting violators. In U.S. v. Zwerner, a jury found that Carl Zwerner WILLFULLY failed to file FBARs disclosing non-U.S. accounts, thus exposing himself to 50% of the highest balance penalties for EACH of his violating years. Since there were 3 years of violations, a 150% penalty could be imposed.

Taxpayers who are weighing their options as to dealing with prior FBAR reporting failures will probably feel greater pressure to enter into the OVDI program and submit to the 27.5% penalty under this verdict. Taxpayers with a reporting failure but who do not make any corrective filings, attempt a quiet disclosure, or even enter into the OVDI program but then opt-out to seek application of penalties less egregious than the 27.5% penalty, will face the not-so-subtle pressure of this finding of wilfullness and the IRS’ assertion of a separate 50% penalty for each year of violation.

There were facts here that would suggest that a multi-year willfulness penalty is both unusual and unexpected. These include:
a.Mr. Zwerner voluntarily came forward and disclosed his noncompliance to the IRS, and filed corrective returns and paid late taxes and interest, before the IRS contacted him or any bank provided his account information to the U.S.;
b. When the official OVDI program came into being, Mr. Zwerner sought to gain entry to it (but was denied entry);
c. The account predated the FBAR filing requirement;
d. It is not clear whether Mr. Zwerner knew of the FBAR filing requirement at the time the original filings were due;
e. The IRS is seeking penalties worse than those provided to similarly situated taxpayers who entered the OVDI at a later date;
f. The imposition of multiple year penalties is highly unusual, and rarely sought even for criminal violations;
g. There are allegations of improprieties by the agent in its handling of the matter; and
h. Tax fraud was not found.
Some not so favorable facts were:
a. Mr. Zwerner did not disclose the existence of the accounts to his tax preparer, even though the questionnaire asked the question about the accounts (although Mr. Zwerner contends he thought he was answering the question correctly because the accounts were in the name of a foundation and not in his individual name);
b. Mr. Zwerner did not report the income from the accounts when it was earned;
c. Mr. Zwerner took steps to affirmatively hide the existence of the account (although not necessarily for tax avoidance purposes);
d. Mr. Zwerner signed a statement that arguably admitted he intentionally did not file or disclose (although Mr. Zwerner contends that the statement does not make such an admission, and that the statement was prepared by the IRS agent and signed by Mr. Zwerner on the false promise that it was needed to obtain a reduced penalty).
The jury found willfulness. Perhaps that is not surprising, since there are enough unfavorable facts to support willfulness. What is more unexpected and unusual is the IRS’ overreaching through the imposition of a multiple year penalty when there does not appear to be egregious facts or bad acts supporting it.

The IRS now has this verdict to waive around and scare nonfilers into the OVDI program without a penalty opt-out. Indeed, it wasted now time in raising the flag per the Justice Department’s release and statement on the verdict on May 29.

It has not yet been determined what final penalties the court will allow. An appeal of a multi-year penalty may be possible based on a Constitutional challenge to such penalties as excessive under the 8th Amendment.

Wednesday, May 21, 2014


The U.S. has a tax competitiveness problem – its effective corporate tax rates are among the highest in the world. Once upon a time the U.S. was on the low end, and attracted business and capital. Now that it is on the high end, new capital is repelled and existing businesses look to reorganize abroad to save taxes.

This is the story behind Pfizer’s attempt to acquire U.K pharmaceutical company AstraZeneca. While that transaction may or may not proceed, the tax policy discussion has heated up because of it.

There are two ways to address this problem. The first would be to reduce corporate tax rates, and otherwise make the U.S. a favorable tax jurisdiction. The second would be to impose punitive rules on U.S. businesses that seek to move abroad. Given today’s political environment, which one do you think is receiving more attention? I’ll give you a clue – the proposed legislation that has come out of the Pfizer attempt is entitled the “Stop Corporate Inversions Act of 2014.”

This legislation would expand the punitive provisions of existing Code §7874 to reach transactions not only where the U.S. entity’s shareholders acquire 80% or more of the foreign entity (as under existing law) but to lower that threshold to 50%, and to also apply the provisions to other transactions regardless of the 50% threshold. It would also expand its application to partnerships.

Sunday, May 18, 2014


In 2011, the IRS sought to regulate tax return preparers, and issued regulations that required “registered tax return preparers” to pass a competency test, a tax compliance check, and a suitability check. They would also have to complete 15 hours of continuing education each year.

In 2014, the Court of Appeals for the District of Columbia found that no authority had been granted to the IRS by law to impose such regulations. The time for an appeal to the U.S. Supreme Court has no passed, so these regulations are now a dead letter. Congress may yet act in the future to grant authority to the IRS to regulate preparers.

Most of us are aware of the benefits of regulation. The Institute for Justice reminds us of some of the negatives, including (a) the forcing out of the market of longtime, trusted tax preparers by the out-of-pocket costs and opportunity costs imposed by the regulations, and (b) higher tax preparation costs to consumers as the regulatory costs imposed on preparers are passed on. The Institute notes that most, if not all, of the benefits of mandatory regulation can be obtained through a VOLUNTARY certification program, without unnecessarily imposing costs on those who don’t value the certification or license.

Tuesday, May 13, 2014


Gov. Rick Scott signed tax and fee cuts into law on May 11, 2014. The key cuts are:

a. three sales tax holidays—one each for hurricane supplies, back to school supplies and energy efficient appliances;

b. sales tax exemptions on child car seats, youth bicycle helmets, college meal plans, therapeutic pet foods and cement mixers; and

c. a reduction in electricity taxes.

These cuts are expected to save Floridians more than $121 million in taxes. Last month, cuts in motor vehicle fees of $400 million were also enacted.

Sunday, May 11, 2014


Upon the death of wife, wife’s assets were supposed to be divided into two marital deduction trusts and a bypass family trust. An estate tax return was filed, and an estate tax deduction was taken for the transfer that was supposed to be made to the marital trusts.

No division was ever made during husband’s remaining lifetime after wife’s death. Instead, the combined assets were reported for income tax purposes as one trust. When husband died, the issue arose as to how much of the remaining assets should be included in husband’s gross estate per being held in marital trusts under §2044, and how much was not to be included as being held in the family trust.

Not surprisingly, the husband’s estate argued that none of the trust assets were includible. Its theory was that $393,978 that had been withdrawn and put in the account of the husband after the death of the wife had come from the marital trust assets, and that a similar depletion of the marital trust assets occurred for $1,080,802 that had been withdrawn and paid to charity. With those withdrawals, and working backwards from what should have been used to fund the marital trust, in their estimation there was nothing left in the marital trust.

The IRS took the opposite tack and asserted that ALL of the remaining assets were in the marital trusts.

The Tax Court took a facts and circumstances approach, and did its best to determine which trusts should be charged with the withdrawals that had occurred. It found that the $393,978 that was paid to the husband’s account must have come from the marital trusts under the HEMS provision of those trusts, since the family trust provisions did not allow for distributions to the husband of principal. It then charged the charitable contributions to the family trust, again seeking which trust should be deemed to have paid out its assets based on the authorized distributions in each. After accounting for those distributions, it then provided what portion of the total remaining assets were allocable to the marital trusts and thus includible in the husband’s gross estate.

The fact that the division of assets did not occur at the death of the first spouse should not come as a surprise. Oftentimes, the proper professionals are not involved at the time of the first death, or the family or trustees do not follow their instructions, and thus the proper division does not occur. The problem is often not uncovered until the death of the surviving spouse.

The case confirms that the parties will not be “punished” for failing to make the division. Instead, the proper course of action is to make a constructive division as if the proper division occurred, and then attempt to deal with intervening occurrences prior to the death of the second spouse in a reasonable manner (such as the substantial distributions made in the subject case).

Estate of Elwood H. Olsen, et al., TC Memo 2014-58

Saturday, May 03, 2014


U.S. persons with an interest in a non-U.S. account must annually file a FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) if the aggregate maximum values of the foreign financial accounts exceed $10,000 at any time during the calendar year. FinCEN Form 114 superseded Treasury Form TD F 90-22.1 and must be filed electronically through the BSA E-Filing System. Having ‘signature authority’ over a foreign account is enough of an interest in the account to be required to report it on an FBAR. Penalties for nonfiling can be quite substantial, including 50% of the value of the account for willful violations (repeated for each year of violation). Criminal penalties can also apply.

The IRS recently issued a “Reference Guide on the Report of Foreign Bank and Financial Accounts (FBAR),” which summarizes and augments previously published information on the FBAR filing requirements. The Guide defines ‘signature authority’ as “the authority of an individual (alone or in conjunction with another individual) to control the disposition of assets held in a foreign financial account by direct communication (whether in writing or otherwise) to the bank or other financial institution that maintains the financial account.” It then goes on to provide this example of signature authority:

Example: Megan, a United States resident, has a power of attorney on her elderly parents’ accounts in Canada, but she has never exercised the power of attorney. Megan is required to file an FBAR if the power of attorney gives her signature authority over the financial accounts. Whether or not the authority is ever exercised is irrelevant to the FBAR filing requirement.

Powers of attorney, especially durable powers of attorney, are a staple of estate planning. Planners will suggest them at the time estate planning documents are done so as to allow a trusted family member or friend to handle financial and legal affairs in the event of incapacity. Many, if not most, of durable powers of attorney, include authority to sign on behalf the principal for bank accounts of the principal. Per the above Example and the Guide’s definition of signature authority, persons named in such powers of attorney appear to be at risk for FBAR filing obligations and penalties in regard to foreign accounts of the person issuing the power – holy cow! One can legitimately question how many of such power holders (or their tax preparers or other tax professionals) are aware of this responsibility. One can also question the appropriateness of this responsibility and liability.

Some thoughts, observations, and concerns:

  • Durable powers are set up before there is incapacity, and thus there may be a long period of dormancy where the powers are not exercised because the principal is well and capable of managing his or her own financial affairs. In most such situations, the power holder is not doing anything and often has no knowledge of the assets or accounts of the principal. It is clearly not the norm for such power holders to ask, inquire, or gather information regarding the accounts of the principal. So how is the power holder to know about the accounts? Is the IRS now requiring that the entire dynamic of the durable power of attorney relationship be modified, such that the power holder must inquire and obtain details of the principal’s accounts?
  • Often, the power holder does not even know they are appointed. The durable power is signed, but then may be kept with the testator’s estate planning documents and not delivered to the power holder until it is needed. Alternatively, the powers are often left in escrow or custody with the estate planning attorney, to be released only if the attorney learns of a need for their use. How will the IRS address this situation? See the discussion below regarding lack of knowledge.
  • Some states allow for “springing” powers – powers that are not effective until the principal is incapacitated or has some other mental or physical condition. Thus, even if the power holder knows of its existence, he or she may not be advised once it becomes effective. One can also foresee disputes with the IRS over when or if such springing power took effect.
  • How effective will a “lack of knowledge” defense be to penalties? Even if effective for removing the most egregious penalties that rely on willfulness, it may not remove all penalties, such as a non-willful violation (up to $10,000 per violation) and negligent violations (up to $500). Further, no one wants to rely on proving lack of knowledge – it is unknown how many levels of IRS audit, review and litigation may be needed to prevail on such a claim, if one is successful at all. It is not an easy thing to prove a negative. At a minimum, the IRS should clarify that lack of knowledge voids the penalty.
  • What happens if the principal reports the account, but the account holder does not, or vice-versa? The guide, in discussing agents in general, indicates that both of them must file (if both are U.S. persons).
  • If a power of attorney is signed in the U.S., there is always the question of its enforceability in foreign jurisdictions. This might be another area of dispute with the IRS. As to filers, it would not be a good idea to rely on this – as in most foreign filings where there is a question, the better advice is usually to file notwithstanding any uncertainty.
  • Most durable powers of attorney do not specifically describe each account to which it applies with specificity, but instead have a general description by type – e.g., “bank accounts” and “brokerage accounts.” The general definition of ‘signature authority’ coupled with the Example lead to the conclusion that the IRS intends to apply this rule to such generally described accounts. The Example describes a power of attorney over an account. Perhaps the example can be read narrowly to apply only to a specifically named account in the power of attorney instrument. If so, that would remove most of the above concerns, and if that is intended the IRS should so clarify the example. It would be a logical and fair limitation on such liability.

Reference Guide on the Report of Foreign Bank and Financial Accounts (FBAR)