The Tax Wars Blog

DOJ SETTLES WILLFUL FBAR PENALTY WITH HOLOCAUST SURVIVOR AFTER COURT DENIES ITS MOTION FOR SUMMARY JUDGMENT

Posted on November 8, 2023 by taxpenaltylawyer

The IRS had assessed a willful FBAR penalty against Walter Schik (Schik) in the amount of approximately $8.8 million for failure to timely file FinCEN Form 114 for the year 2007. When Schik did not pay the assessed amount the government brought suit in U.S. District Court to reduce the assessment to judgment. The IRS could not attempt to administratively collect the penalty assessment through levy because the FBAR penalty is not a penalty that IRS is empowered to collect administratively. Rather, the government must sue to obtain a judgment which it then can pursue collection on. (USA v.Walter Schik US District Court SDNY Case No. 20 Civ. 2211(MVK) filed 8/0/21)

The Government’s Argument

The Government’s motion was supported in part by the following averred undisputed facts (per Memorandum of Law in Support of the USA’s Motion for Summary Judgment)

Schik was the beneficial owner of two Swiss foreign financial accounts at UBS during all of 2007.
As of December 31, 2007 the account balances together amounted to more than $14 million.
The bulk of the funds were held in a numbered account.
The other account was held in the name of a nominee shell entity organized in Panama.
Schik had personally signed the documents opening the accounts.
Schik was required under law to file and FBAR for the year 2007.
Schik had instructed UBS to send all bank statements to David Beck (and later his son Josef Beck), a financial advisor, whom Schik had designated to manage the account for him.
Beck sent copies of the UBS statements to Schik periodically.
In 2012 Josef Beck was indicted on federal charges of conspiring to enable U.S. persons to evade U.S. taxes on their Swiss bank account earnings.
Schik had signed a document instructing UBS not to invest in U.S. securities after November 1, 2000 because, in his words “I am aware of the new tax regulations.”
Schik’s tax return for 2007 reported a “No” answer to the question on Schedule B asking if the taxpayer had an interest in a foreign financial account and referencing the instructions for reporting of such accounts.
Schik did not file a timely FBAR for the year 2007.
Schik did not initially inform his CPA tax return preparer of the existence of the Swiss accounts during 2007
Schik had the opportunity to review his 2007 return prior to filing but did not do so.
In 2009 Schik had learned through newspaper reports that UBS had entered into a Deferred Prosecution Agreement with the Department of Justice under which the bank had agreed to disclose names of U.S. customers to the DOJ and to cease to conduct business with customers who had undeclared accounts.
At some point in 2009 UBS required that Schik’s accounts with them be closed.
After learning of the UBS/DOJ agreement, Schik submitted a Voluntary Disclosure to IRS under the IRS’s 2009 Offshore Voluntary Disclosure Program.
The IRS in February 2010 notified Schik that his Voluntary Disclosure was not accepted “due to timelines and / or completeness.”
Schik’s 2008 return filed in October 2009 disclosed his Swiss accounts.
Schik belatedly filed a 2007 FBAR in December 2010.

The Government argued in its Motion for Summary Judgment that, consistent with rulings in the bulk of decided cases dealing with this issue, the above facts objectively establish as a matter of law that Schik was reckless in signing his 2007 return without reviewing it: that he is charged with knowledge of everything stated in the return including his false “No” answer to the Foreign Financial Account question on Schedule B of the return; and, that as such, his conduct in not filing an FBAR or reporting his Swiss foreign financial accounts, as a matter of law, was willful. Thus, the government argued, its Motion for Summary Judgment should be granted because there were no material facts germane to the question of Schik’s willfulness for a jury to consider.

Schik’s Counter-argument

Schik’s counter-arguments ( per Defendants’ Memorandum of Law in Opposition to Plaintiff’s Motion for Summary Judgment) focused on his subjective intent, state of mind, and terrible events of his childhood that molded an adult who obsessively feared disclosing all of his financial resources to the government, any government. Schik’s Memorandum included:

Schik is an almost 100 year-old Holocaust survivor.
A history of his childhood leading up to and during World War II.
How in 1938 his family, Jewish, was forced to flee persecution and Vienna leaving behind all of their possessions and friends
How they sought safety in Hungary until Hitler’s occupation of that country in 1944.
How at that time the Nazis forcefully separated Schik, then thirteen, from his family.
How Schik was sent to a concentration camp near Budapest while his parents, two brothers and sisters were transported to Auschwitz, the Nazi’s most infamous death camp.
Schik was later released and travelled alone by foot to find shelter with a relative in Budapest.
Not long after Schik and his relative were rounded up by the Nazi’s and forced to walk on foot to Austria, a long and hazardous journey during which they witnessed the death of many in route.
During the Death March Schik furtively removed the Yellow Star from his coat and slipped away.
With the help of an old Jewish forger Schik was able to walk his way back to Budapest where he learned that his parents and siblings had been murdered at Auschwitz.
Following the war Schik, on his way to Belgium was stopped by police and placed in a UJA orphanage in Strasbourg, France.
At the orphanage Schik connected with a Yeshiva group and was allowed to join the group emigrating to the U.S. by adopting the identity of a boy who’d dropped out.
These horrific experiences left Schik with what is referred to as Holocaust mentality, a real and intense fear of future discrimination or persecution together with a compulsive need to have hidden financial resources and an escape plan should there be another Holocaust.
This fear shaped Schik’s life and thinking.
That Schik immigrated to the U.S. in 1947at age 16.
That Schik received little formal education in Vienna, not having advanced past elementary school with no formal education at all in the U.S.
Schik had no education in English and had never studied U.S. tax law, international tax law or accounting.
Schik started working as an errand boy and worked his way up to his having his own tie company which he ran with a partner.
He was never involved with managing the financials for the company, his involvement was with selling the ties. Schik was a tie salesman.
Schik became a U.S. citizen in1957.
He opened the first Swiss account during the 1960s with funds he inherited from family member’s estates as most of the family had perished in the Holocaust.
None of the funds in Schik’s accounts came from outbound transfers from Schik’s U.S. business earnings or bank accounts.
The Swiss funds were not managed by Schik. He had completely entrusted his overseas funds to the Becks.
The Backs and not Schik had set up the Panama Company to hold one of the accounts. Schik did not instruct them to form this company to hold his account.
The net unreported additional income from the Swiss accounts turned out to be less than four percent of Schik’s total adjusted gross income for the tax year 2007.
The Government has never fully explained why it had rejected Schik’s Voluntary Disclosure.
Schik’s 2007 tax return preparer was a CPA amply qualified to preparer individual tax returns.
The preparer had never asked Schik if he had foreign financial accounts.
Schik was not required complete a Tax Return Questionnaire or other document that might have inquired about foreign financial accounts.
The preparer only requested of Schik that he forward to him all of the tax forms (1099s, etc.) that he’d received pertaining to the year 2007.
Schik never received any Form 1099-like forms from UBS regarding his accounts held by them.
Schik had no clue about the requirement to file and FBAR.
He had no knowledge that U.S. citizens were required to report and pay tax on their world-wide income.
Had he reviewed his tax return prior to filing he would not have understood what he was reviewing.
As soon as Schik learned of the problem with the Swiss account, he’d contacted his return preparer who, in turn, referred his to tax counsel resulting in the Voluntary Disclosure mentioned above.

Schik’s Legal Argument

Schik argued that the above facts evince that there are real issues about material facts in dispute for the jury to decide. Further, that the Government has the burden of establishing the absence of a genuine issue of material fact. Further, that the court in ruling on the Government’s Motion must view the facts in the light most favorable to the non-moving party and must resolve all ambiguities and draw all reasonable references against the moving party.

Schik argued that reckless conduct or careless disregard, despite the rulings on other cases on different facts, does not rise to the level of willful conduct as defined by the U.S. Supreme Court, that is, an intentional violation of a known legal duty. That a taxpayer who fails to review his or her return should not be deemed to have knowledge of the entire contents of the return including the questions regarding foreign financial accounts at the bottom of Schedule B. To do so ignores that most taxpayers would not understand their return, even if reviewed, because tax returns have become extremely complex and obscure. It also ignores Schik’s Holocaust mentality and how those events during his most impressionable years may have impacted his state of mind.

It is noteworthy that a number of studies have established that Holocaust survivors can experience post traumatic stress long into their elderly years. Schik did not argue that he was suffering from ongoing PTSD which generated such intense fears that it was impossible for him to disclose his safety-net funds in Switzerland. That, in effect, his failure to disclose was involuntary. The court file does not disclose if there was evidence to support such an argument.

Schik also argued that the standard of proof for the jury should be “clear and convincing evidence” and not by a “preponderance of the evidence” as the government and other cases have held. Schik also argued that the 50%FBAR penalty volutes the Eighth Amendment to the U.S. Constitution which he argued prohibits fines grossly disproportionate to the offense committed. He also argued that the penalty was calculated incorrectly, on the bank balances as of 12/31/2007 rather than on the date of the offense, namely 6/30/2008, the due date for filing the FBAR.

The Court’s Ruling

The Court denied the Governments Motion for Summary Judgment. In doing so, it adopted the “preponderance of evidence” standard, however. The court ruled that the penalty calculation could be corrected by the Government without suffering a dismissal of its case. The court did not address the Eighth Amendment question, a strictly legal matter.

The Court found that “there are genuine issues of fact regarding whether Mr. Schik willfully failed to disclose his foreign bank accounts. If one were to be found willful as a matter of law from merely signing a return it would render any distinction between willful and non-willful conduct, which congress had clearly intended, as completely meaningless.

The Court acknowledged that the Supreme Court has stated that “the plain meaning of willful is elusive because it is a word “of many meanings whose construction is often dependent on the context in which it appears.” Sofeco Ins.Co.v.Burr 351 U.S. 47, 57 (2004) “In a civil tax context, however, willful conduct generally includes not only knowing violations of a standard but reckless ones as well.” (Sofeco Ins. Co v.Burr 551 U.S.47, 57). The Court also noted that while the Second Circuit (to which appeal would lie in this case) has not yet ruled, every circuit court that has addressed this issue reads the FBAR penalty statute (BSA 5321(a)(5) to include as willful violations reckless disregard of a known or obvious risk.

The Court did not accept that signing a return without reviewing it was reckless as a matter of law as opposed to merely negligent. Here the court found material facts in dispute, which, if believed by a jury, could result in a verdict for Schik, namely:

That Schik did not manage his Holocaust safety net account.
That Schik did not know of the requirement to disclose those funds.
That Schik’s tax preparer, an experienced CPA, trusted and relied upon by Schik, never asked Schik if he had an interest in any foreign bank accounts.
That it is likely the preparer’s software auto-filled in the “No” answer to the foreign bank account question on Schik’s return.

In the end, the court decided, whether Schik’s conduct was willful or not willful is a question of fact. There are facts material to that determination in dispute about which only the jury can decide. Determining the truth would involve examining Schik’s subjective state of mind, whether he honestly did not know of the reporting requirement and relied solely on his return preparer. The Court therefore cannot determine as a matter of law that Schik’s conduct was willful.

Again, no argument was raised suggesting that Schik’s Holocaust mentality rose to the level of clinical post traumatic stress disorder continuing into elderly years which created such fear as to compel him obsessively to secret his Swiss accounts.

The Settlement

On August 23, 2023 Schik and the Government filed a Stipulation and Order of Settlement and Dismissal under which the FBAR penalty was reduced to $6,030,000 from the assessed penalty of $8,822,806.

Why did the government agree to the reduction? Presumably, the government assessed the hazards of litigation including that Schik’s Holocaust trauma might make the jury sympathetic towards him. There is also the cost of litigation to the government.

The government seeks to resolve these FBAR penalty cases in a Motion for Summary Judgment before the judge instead of having the issue go to a jury.

Schik also likely weighed the risks of a jury trial.

The settlement did not resolve any income tax adjustments although Schik may have filed amended returns and, if so, would have paid the income taxes due.

Likewise, the settlement did not grant immunity to Schik for any criminal violations although, given the facts and, that willfulness for criminal purposes does not include reckless conduct and statute of limitations such charges are unlikely.

RSS Comments

The courts seem to take an ivory tower view of tax returns. Tax preparation is certainly not a “scrivener’s function” as some courts have suggested. Today’s tax returns are complex document with every entry representing an interpretation of some provision in the Internal Revenue Code. Consequently, to suggest that the average taxpayer can review and understand his or her tax returns is naïve To suggest that the average taxpayer can read and understand the FBAR instructions is a fantasy. Professionals disagree about whether certain assets are reportable. Thus, the District Court in this case was correct in questioning the legal framework for other courts holding that a person with foreign financial accounts who signs and files a return without reviewing will be deemed willful when the FBQR question is answered “No” or not answered.

The Memorandums in Support and Opposition to the Motion for Summary Judgment filed in this case also present a good illustration of the facts which must be adduced to argue for non-willfulness in streamlined filings or in requests for abatement of willful penalty assessments.

Caveat: Evaluating whether conduct is willful or negligent for FBAR penalty purposes is a legal determination which should be undertaken by a tax attorney experienced in such matters.

Robert S. Steinberg, Esquire

rss@taxpenaltylawyer.com

Posted in FBAR PENALTIES, FBARS, OFFSHORE BANK ACCOUNTS | Leave a comment

HOW IRS COLLECTS A TAX DEBT

Posted on September 7, 2023 by taxpenaltylawyer

NOTE: THIS POST IS DIRECTED AT TAXPAYERS WHO ARE NOT TAX PROFESSIONS. HENCE, CITATIONS TO INTERNAL REVENUE CODE SECTIONS, REGULATIONS AND COURT CASES ARE, WITH ONE EXCEPTION, NOT INCLUDED.

The IRS is the worst creditor to have. If you owe money to a bank or hospital, they generally must take you to court before they can start seizing your assets to pay what is owed. The must obtain an order, called a judgment. They can then record the judgment on public records to protect their place in line versus other creditors to whom you owe money.

The IRS has a special status. It generally (exceptions are discussed below) does not have to go through the process of going to court to reduce its claim against you to judgment. It can assess, that is record the tax as a liability you owe, and seize your assets without first obtaining a court order.

When you file a tax return reporting a tax due, a tax lien is created on your assets for the amount due. The IRS will eventually send you a Notice and Demand for payment that will include interest and penalty (such as failure to file or pay tax), both of which are added to the tax you owe. If you do not pay IRS may then send you a Notice of Intent to Levy (initially, usually on your bank accounts). If you believe IRS is unreasonably ignoring less severe collection measures, you can request a Collection Due Process Hearing with the Appeals Division of IRS. Following the hearing which can be in person , virtual or telephone, the IRS Appeals Officer will prepare a Notice Determination which will state that the IRS Levy action was reasonable or not. This determination is reviewable in Tax Court but generally only as to whether the Appeals Officer abused his or her discretion in making the determination.

If you filed a return showing no tax due but IRS adjusts your return based on 1099s or W-2s it received from third parties, the same procedures apply as with a tax due return but at Appeal you can also argue that you do not owe the tax. In that case, the Tax Court would review the Appeals Decision on whether you owe the tax de novo, or based on all facts and law.

If IRS determines you owe additional tax on a return filed based on a formal audit and you do not agree to allow IRS to assess and collect the tax, penalty (such as substantial understatement or negligence) and interest IRS cannot immediately assess the additional tax. It must first mail to you at your last known address a Notice of Deficiency. The NOD states the amount of the deficiency in tax IRS has determined. You then have 90 days (no extensions allowed) to file a petition in the U.S. Tax Court stating errors you believe overstate the tax claimed to be due in the IRS Notice of Deficiency. If no petition is filed IRS will assess the tax and commence to attempt to collect through voluntary payment or forced collection actions (levy, seizure, foreclosure of tax lien). The IRS will also record its federal tax lien to secure its position vis-a- vis other creditors. A public record of the federal tax lien negatively impacts your FICO credit score.

There are some penalties, however, for which the IRS may assess the tax and collect via its administrative powers to levy and seize assets. Some penalties expressly require IRS to go to court to collect. The FBAR penalties, for example, provide that IRS may, within two years of assessment, bring a suit to reduce the taxpayers’ liability for the penalty to judgment.

Other penalties may or may not be immediately assessed and collected administratively, depending on whether the particular penalty is deemed assessable under the Internal Revenue Code.

The U.S. Tax Court has recently held that the $10,000 penalty for failure to timely file Form 5471 is not an assessable penalty. Thus, to collect the penalty IRS would have to bring a civil suit in federal court to obtain a judgment. Farhy v. Commissioner 160 T.C. No. 6 (filed April 3, 2023). This issue ultimately could reach the U.S. Supreme Court. If upheld on appeal it would have far-reaching effects as its conclusion could be applied to other foreign reporting penalties such as failure to file Form 3520 with regard to foreign trust interest or foreign gifts of more than $100,000.

Robert S. Steinberg

Posted in IRS COLLECTIONS | Tagged FBAR PENALTIES, FOREIGN REPORTING PENALTIES, PENALTY FOR FAILURE TO REPORT FOREIGN GIFT | Leave a comment

DON’T MISS OUT ON THE MOST GENEROUS OFFSHORE PENALTY RELIEF THE IRS HAS EVER OFFERRED- THE STREAMLINED FILING COMPLIANCE PROCEDURES

Posted on August 22, 2023 by taxpenaltylawyer

The Streamlined Filing Compliance Procedures (Streamlined Process) is a special program under which IRS provides a relatively simpler route by which U.S. taxpayers can potentially resolve past tax oversights and become compliant with U.S. tax reporting rules regarding income, foreign bank accounts or other required foreign reporting forms.

The program is aimed at taxpayers who are not tax criminals and who meet the following eligibility requirements.

Meet a non-residency test for one of the three streamlined years.
1. Have filed or unfiled returns for the past three years for which the due date has passed.
1. Have failed to report the income from a foreign financial account or other foreign source income as required by U.S. tax law and / or failed to file correct FBARs or other foreign reporting forms.
1. Certify that the failure to report all income, pay all tax and submit all required information returns was due to non-willful conduct. The courts and IRS have defined willfulness as “the intentional violation of a known legal duty.” That phrase is easier to recite than to clarify and IRS has been coy about how aggressively it will review taxpayer certifications of non-willfulness. The test turns on both factual analysis and legal conclusions from those facts. Recently, several courts have held that willfulness includes reckless disregard of the law and IRS rules and return instructions referred to on Form 1040, Schedule B. IRS has the final say regarding eligibility for the Streamlined Process. In this regard, see my earlier blog post on Dawww.the-tax-wars.net “Will-O-The Wisp Willfulness in the Streamlined Process “(9/1/14)).

The Streamlined Process is beneficial to taxpayers because it:

Allows one to come into compliance by filing no more than three years of returns and six years of FBARS instead of at least six years of returns required for delinquent returns filed outside of the Streamlined Program.
- Requires a showing that the taxpayer’s non-compliant conduct was non-willful a lower standard of care than “reasonable cause” required for having tax penalties waived or abated outside of the Streamlined program. See my earlier blog post Streamlined Filing vs. Regular Filing with Reasonable Cause Statement (12/22/2022). https://the-tax-wars.net/2022/12/22/streamlined-filing-verses-regular-filing-with-reasonable-cause-statement/
- Avoids the harsh penalty regime, inappropriate for those not tax criminals or willful violators, and, who, in all fairness should not be subject to the maximum penalties for willful violations. Instead, the Streamlined Process permits U.S. persons qualifying as non-residents to come into compliance without penalty and those not meeting the non-residency test who have filed returns to do so by paying a reduced miscellaneous offshore penalty of 5 percent of the highest balance of noncompliant foreign financial assets (required to be reported in an FBAR or on Form 8938 or reported but income not reported) during a six year look back period but no other penalties such as the accuracy-related penalty (can be 20%) on any increased income tax liability.
- Removes the cloud of fear hanging over one’s head about discovery of the non-compliance.
- Brings one into compliance without identifying him or her as a tax-violator and without disclosing to the public that you have entered the program.

Streamlined filers will not initially know if IRS has accepted them into the Streamlined Program. While an IRS audit of your returns will not be automatic, returns may be selected for audit under normal IRS audit guidelines and IRS may determine that conduct, in its eyes, was not non-willful. In that case, IRS could go back further than three years and could assert an FBAR penalty at the conclusion of the audit process. The IRS would have to act within the period allowed under law for making income tax assessments, normally three years unless large amounts of income (more than 25% of all income reported) are found to have not been reported in your returns. This limitations period on making assessments would start to run from the filing date of your original or delinquent returns. These limitations periods, however, do not apply to a year for which IRS successfully proves that fraud was committed in filing the return. The limitations period for IRS assessing the FBAR civil penalty is six years from the due date of the FBAR. For a fuller discussion of the impact of limitations periods, read my blog post on www.the-tax-wars.net “Statutes of Limitations and Streamlined Filings or File Forward Strategies” (8/10/15).

A Streamlined filer will need to employ both a tax preparer experienced in expat tax matters and Streamlined filings as well as a tax attorney experienced in Streamlined filings.

The return preparer will prepare the delinquent or amended returns, FBARS and IRS Form 14653 or 14654 as the filing requires.

The specific areas of representation for the tax attorney will encompass:

Determine the best course of action that will resolve the offshore tax issues.
Determine eligibility for the Streamlined Process with the understanding that IRS has the final say on eligibility and there is no guarantee of it agreeing with my determination.
Draft the required non-willfulness statement (an affidavit signed under penalties of perjury) required under the Streamlined Process.
Review the returns, related foreign forms and FBARs prepared by your return preparer to make sure nothing in the returns is inconsistent with the non-willful certification.
Prepare a cover letter for mailing the Streamlined package to IRS at the special Streamlined address in Austin Texas and mail the package or prepare instructions for the taxpayer to mail the package.

It is essential to provide only truthful and accurate information to the tax attorney and IRS for even erroneous information unintentionally supplied could cause rejection from the program and bring serious adverse consequences. The streamlined non-willful affidavit must be accurate, truthful and completely transparent, that is, stating all relevant facts, both the helpful and unhelpful.

No one can predict when and if the IRS will terminate the Streamlined Program. Therefore, taxpayers who are presently out of compliance regarding foreign income or reporting should promptly seek professional assistance to determine eligibility for filing under the Streamlined Process.

Posted in STREAMLINED FILING COMPLIANCE PROCEDURES, STREAMLINED FILINGS | Tagged FOREIGN BANK ACCOUNTS, Robert S. Steinberg | Leave a comment

FALSE ASSUMPTIONS ABOUT TAXES ARE DANGEROUS

Posted on May 14, 2023 by taxpenaltylawyer

May 14, 2023

ASSUMPTIONS IN LIFE

We live our lives amidst a world of assumptions, the things we take for granted, not because they have been proved, but, because we simply believe them to be true. Sometimes we later find that we have made a false assumption like having once naively believed all politicians are candid. Lemony Snicket in “The Austere Academy” says:

Assumptions are dangerous things to make, and like all dangerous things to make—bombs, for instance, or strawberry shortcake-if you make even the tiniest mistake you can find yourself in terrible trouble.

In the espionage novel “The Kremlin Letter,” by Noel Behn (January 1, 1966), spies in training are taught “Avoid assumptions, stay alive.”

FALSE INFERNCES, CONVICTIONS AND MISTAKEN IDENTITY

False assumptions can be false inferences or generalizations, false convictions or mistaken identities. Believing to be true what is false can lead one to foolishness, disappointment, unhappiness or danger.

False Inference: In David Benioff’s comic-tragic novel, “City of Thieves” a thief and deserter caught in the German siege of Leningrad during WWII, are offered an alternative to execution by the officer in charge. Find a dozen eggs for his daughter’s wedding cake in a starving city barren of any food whatsoever. The badly paired companions hear of a farmer guarding a bunch of chickens on a rooftop. They track down the place only to find the farmer dead and his daughter guarding one surviving bird. They coax the bird from her and return with it to the communal apartment of a friend to wait for the chicken to produce eggs. They are watching the bird when another resident, a doctor enters. Upon seeing the bird he says, great, we will have soup tonight as I have a potato. The thief screams “do not touch that chicken, we need its eggs to save our lives.” The doctor laughing says, “You idiots that is not a chicken it is a rooster.”

False Conviction: In Pulitzer Prize recipient Philip Roth’s latest short novel “Nemesis” a promising young park counselor comes to believe he is the carrier of polio who has spread the dreaded disease to his playground charges. As a result he forsakes his dearly beloved fiancé and lives out the remainder of his life in guilt ridden unhappiness.

Mistaken Identity: Middle aged advertising executive Roger Thornhill (Carey Grant), mistaken for a spy, in turn, mistakes Eve Kendall (Eva Marie Saint) for a foreign collaborator. He is pursued across the country surviving a deadly crop duster and the dramatic heights of Mount Rushmore (Alfred Hitchcock’s legendary 1959 thriller “North by Northwest”).

SOME COMMON FALSE ASSUMPTIONS ABOUT INCOME TAXES AND THE IRS

In over 40 years of practice I have represented many clients in trouble with the IRS. Many times the trouble emanated from a false assumption about how the tax system works. Although Albert Einstein said, “We can’t solve problems by using the same kind of thinking we used when we created them,” that is exactly what many try to do. Some examples of false assumptions about the tax system are:

1. It is best not to file my return until I can pay the tax due. Here is an example of one poor decision leading to another based on a false assumption. Poor decision No. 1: Not paying sufficient estimated tax or having sufficient tax withheld. No. 2: Waiting to file Form 1040 until able to pay the tax. Result: Best case: 5% per month penalty for late filing (25% maximum) instead of 0.5% penalty per month for late payment. Worst case: Criminal charge for willful failure to file a return (sentence up to one year and fine up to $25,000). The return should be filed by April 15. An extension may not be valid if the tax due is not paid on April 15.

2. It is best to file an extension stating that the tax liability is zero when I cannot pay the tax actually known to be due. The false assumption here is twofold: (1) The extension is valid when it is not because the tax has not been reasonably estimated and paid, and (2) This is OK to do when it is not. Although the extension is not a return filed under penalties of perjury like Form 1040, the extension so prepared is a false document knowingly submitted to IRS and could be construed as a tax crime carrying a sentence of up to one year in jail and a fine of up to $10,000.

3. My spouse cheated on me and I am therefore an innocent spouse for tax purposes. Your spouse may have cheated on you and on the IRS but filing a joint return carries with it joint and several liability, unless you qualify for one of three narrow and technical exceptions commonly referred to as “innocent spouse.” The only way to guarantee that you won’t be liable for your spouse’s tax indiscretions is to file a separate return. Thus, if you suspect that your spouse is flaunting the tax law, don’t sign a joint return, and file as a married person filing separately. Caveat: This is a financially disadvantage tax status in most cases. Therefore, don’t file separate from your spouse unless you have good cause to believe the joint return presented is false or that the tax will not be paid.

4. I owe the IRS money but I’m OK not having heard from them. Wrong, you don’t have to actually receive a notice from IRS to be charged with having received the notice. For example, if you were divorced in January 2010 and filed a 2009 joint return with the address listed as the marital residence (same as the address on your 2008 return) IRS will mail the notice and demand letter and collection due process notice to the marital address. If your former spouse does not give you the notice, your appeal rights will be circumscribed, liens filed will adversely impact your credit rating and enforced collection action may ensue before you can offer alternative collection proposals. Therefore, always file Form 8822 when you change your residence address before filing a tax return with IRS reporting the new address.

5. I can settle my tax debt for pennies on the dollar using one of the so called tax dispute resolution companies: I wish this was true but the statement is another false premise for all but those having virtually no assets or income. Most find virtually useless the Offer in Compromise process as a means of settling tax debts. IRS accepts very few Offers in Compromise because the structure is very rigid and Revenue Officers have little discretion for making exceptions to the law or rules in the Internal Revenue Manual. Moreover, it is safer to their careers to simply follow the guidelines to the letter. The FTC recently put out of business American Tax Relief LLC, one of many scam operators promising to settle tax debts for pennies on the dollar.

6. I’ll send IRS $100 per month to keep them off my back. Wrong again, like Offers in Compromise, obtaining an installment payment agreement for amounts over $25,000 is very arduous. IRS in determining the amount you must remit monthly starts with your gross income and deducts taxes and allowable necessary living expenses based on national and regional averages for various categories. For upper income taxpayers or those in high cost localities like Miami the result is not very appealing. Contrariwise, for tax debts up to $25,000 that can be paid in 5 years or less, the installment payment process can be useful.

7. I own nothing but my home which is my homestead that creditors cannot take. Wrong once more, as IRS is not like other creditors. State creditor exemptions do not apply to IRS.

8. I’ll prepare my own return and claim any mistake was due to a tax software error. Lots of luck to you.In Au v. Commissioner (TC memo 2010-247, the Tax Court rejected the taxpayer’s so called “Turbo Tax Defense” and upheld the 20% penalty assessed by IRS for erroneous deductions in the return.

9. I’ll blame the tax preparer if deductions are disallowed or income is left off my return. No matter who prepares your tax return, you are ultimately responsible for all of the information on your tax return. Read the declaration at the bottom of page two of Form 1040 before signing and never sign a blank return or one that contains errors or missing information. Blaming the tax preparer in a criminal tax case is a dangerous strategy because he or she will take the stand and bury you.

10. I’m self employed and only have to report income for which I’ve received a Form 1099. Very, very wrong, as IRS has several court accepted methods of reconstructing your income even if they do not uncover the specific payment. These include bank deposit analysis plus cash expenditures and net worth analysis plus cash expenditures for living expenses. In knowingly under-reporting income you subject yourself to substantial civil penalties (20% accuracy related penalty or 75% civil fraud penalty) and potential criminal sanctions.

11. I’m not worried about criminal tax charges because I can always settle and agree to pay what I owe. Wrong again as the IRS criminal tax enforcement program is not focused on collecting the tax. It is intended as a deterrent to scare other taxpayers into compliance. In the criminal case, IRS will seek jail time and restitution of the dollar loss to the government. Afterwards, IRS will assess the civil tax liability (there being no statue of limitations if fraud is proved) and civil fraud penalty.

CONCLUSION

Venerable Buddhist sage Ajahn Chah asks “I can observe anger and work with greed, but how does one observe delusion? Answer: You’re riding a horse and asking “Where’s the horse? Pay attention.” Life would be terribly frustrating without the common assumptions we live with. How could we drive our automobiles if we didn’t assume that other driver’s will obey the traffic laws? This is probably not such a good example in Miami, but you get the idea; some cultural, biological, intellectual or personal assumptions are necessary if true or harmlessly self delusional. But, self deception in the tax arena is another matter altogether. It can be damaging to your financial health and personal freedom to make false assumptions while filing your tax return or in dealing with the IRS. A competent tax attorney can help you sort out fantasy from reality.

Facing a tax problem with IRS?

Facing a threatened or assessed tax penalty?

Having tax problems during or after a divorce?

Contact me!

Robert S. Steinberg, PA

Robert S. Steinberg, Tax Attorney

Steinberg_assoc@bellsouth.net

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STREAMLINED FILING VERSES REGULAR FILING WITH REASONABLE CAUSE STATEMENT

Posted on December 22, 2022 by taxpenaltylawyer

“Beware of false knowledge; it is more dangerous than ignorance.”

– George Bernard Shaw

Shaw’s admonition is applicable to both fling delinquent returns using the Streamlined Filing Compliance Procedures or through normal filing channels with a Reasonable Cause Statement attached. . Calls I’ve received from both accountants and perspective clients demonstrate that many are aware of these alternatives but are ignorant of the nuances, complexities and risks of attempting to choose which path to employ to bring a taxpayer into compliance.

The chart below is intended to assist attorneys and CPAs in understanding the important distinguishing features that separate the Streamlined Compliance Procedures and Filing amended returns through normal IRS channels with a Reasonable Cause Statement attached. These two very different paths are the most commonly employed for bringing delinquent taxpayers with offshore income into compliance.

COMPARISON CHART – REASONABLE CAUSE VERSUS STREAMLINED↓

CHARACTERISTIC OR FACTS SHOWING	QUALIFIES AS REAS. CAUSE	QUALIFIES AS NON-WILLFULFOR STREAMLIED
Defined as	Having exercised ordinary business care and prudence	Not having intentionally violated a known legal duty to file or acted recklessly.
Negligent conduct	NO	YES
Grossly negligent conduct	NO	Yes
Reckless conduct in failing to read instructions referred to on Schedule B of Form 1040 regarding foreign bank accounts	NO	Courts have treated as Willful Blindness but might still qualify under exceptional circumstances.
Extent of Due diligence required	Did all that you could, given education and experience, but still could not timely file.	Lower bar – duty to file unknown or failure to file not intentional or conscious act.
Years included	Generally must go back at least six years – both returns and FBARS	3 for which due date of 1040 passed; 6 for which due date of FBAR passed. .
Reliance on return preparer Reliance on return preparer – Foreign reporting Forms	Generally, No RC for 1040 May provided RC due to complexity	Yes Yes
Income tax penalty	Waived if Reasonable. Cause found	• Outside US None for amended or delinquent returns. • Living inside US None – for amended returns. • If audited None for reported assets or income as long as original return not fraudulent & FBAR not willful. Any additional deficiency subject to all penalties. • Previously assessed penalties – not abated.
Misc. Offshore Penalty	None if Reasonable Cause Found.	Living out of U.S. – none Living in U.S. – 5% of non-compliant assets(if non-willful)
Escapes criminal tax liability?	NO – Unless deemed Voluntary Disclosure. Safer to use IRS Voluntary Disclosure Procedures if possible tax crimes indicated	Same as for Reasonable Cause

Certainty of result – civil?	NO	NO – return might be selected for audit just as any return might be.

Time to complete	Open ended – IRS will assess penalty requiring a resubmit or appeal	Complete upon submission of Streamlined Filing unless audited.
Automatic audit?	No	No
Public disclosure?	No	No



Cost	Need tax attorney and qualified return preparer but more expensive than Streamlined	Expensive – Need tax attorney and qualified return preparer
Submission problems	IRS Service Centers are automatically assessing foreign reporting form penalties without	File returns with Non-Willful Certification – No automatic assessment of penalties.
Conscious decision not to file	No	No
Taking care of other matters and not filing tax return	No	No
Serious job, family, health issues	Yes	Yes
Simply forgetting	No	Possibly if forgetting due to serous job, family, heath distractions.

Deciding how to proceed in offshore cases depends entirely on the specific facts of each taxpayer and requires both knowledge of the law and sound judgment in applying it. Given that, one can still state some obvious and general advantages and disadvantages of these alternatives to the OVDP as related to U.S. citizens or residents.

Major Advantages of Streamlined Process:

Three year income tax filing period in lieu of 6 year Reasonable Cause period.
- There is no offshore penalty for taxpayer’s residing outside of the U.S.Lower tax and interest due to fewer returns amended.Lower legal and accounting fees due to less work required.No 20% accuracy related penalty on the income tax reported in the disclosure unless an examination shows fraud or willfulness.
- No automatic audit – rather return processed like any other return and selected for audit under normal IRS procedures ( but see disadvantages below)

Major disadvantages of Streamlined Procedures:

The Streamlined filer must certify under penalties of perjury (Form 14654 for persons residing within the U.S. and Form 14653 for persons residing outside of the U.S.) that:
- “My failure to report all income, pay all tax, and submit all required information returns, including FBARS, was due to non-willful conduct. I understand that non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of good faith misunderstanding of the requirements of the law.’
- “I recognize if the Internal Revenue Service receives or discovers evidence of willfulness, fraud, or criminal conduct, it may open an examination or investigation that could lead to civil fraud penalties, FBAR penalties, information return penalties, or even referral to Criminal Investigation.”
- IRS has stated that submissions under the Streamlined Process may be subject to verification procedures in that the accuracy and completeness of submissions may be checked against information received from banks, financial advisors and other sources. Therefore, “Taxpayers who are concerned that their failure to report income, pay tax and submit required information returns was due to willful conduct and who therefore seek assurances that they will not be subject to criminal liability and/ or substantial monetary penalties should consider participating in the OVDP and should consult with their professional tax or legal advisors.”
  - Certification is a confession or at least an admission of all of the facts regarding opening and operation of the offshore account.
  - If willful other penalties may apply, e.g., civil fraud penalty.
- Not available for delinquent returns of taxpayers residing within the U.S.
- No simplified PFIC rules available as under former Offshore Voluntary Disclosure Program FAQ 10.

Major problems with filing with Reasonable Cause Statement

Reasonable Cause Statement is also made under penalties of perjury.
Automatic Assessment – When return is filed at an IRS Service Center with a delinquent foreign reporting form or when such form is filed separately (as required for Form 3520), the IRS has been automatically assessing penalties. No one at the Service Centers is reading or considering the Reasonable Cause Statement and request for waiver of the penalties. The IRS Commissioner has advised professionals to have clients resubmit the return and / or foreign reporting form. This usually does not solve the problem and client has to deal with attempts by IRS to collect the assessments. Usually, IRS, when contacted, will postpone collection action; but, this does not stop automated collection actions such as applying overpayments from another year to the tax assessment. The IRS Taxpayer Advocate office has lately not been very helpful in solving these matters which can go on for many months, even more than a year.

Cautions about non-willful certification and Reasonable Cause affidavits

Clients often have fuzzy, or worse, inaccurate recollections of details pertaining to opening their account or accounts, what was discussed and what was written in emails or other communications. IRS or DOJ may obtain information from banks that differs from what the client remembers. Thus, the statement must distinguish between what is known from documents and what is remembered.

Perspective clients are searching the internet and some will attempt to feed the attorney facts that they have learned point to non-willfulness. The attorney must voir dire the client regarding the veracity of non-willful statements.

Original documents may or may not be available.

The willful versus non-willful characterization is a partly subjective analysis that depends to a large extent on the “eyes of the beholder.” Thus, IRS may view as willful that which the taxpayer and even the best counsel may have perceived as non-willful.

Can a taxpayer still qualify as non-willful?

A Tax Analysts Tax Notes article (Richman, Nathan J., “International Tax Enforcement Efforts Include Civil Tools”) quoted Acting Assistant Attorney General of the Department of Justice Tax Division, Caroline Ciraolo who was speaking at the March 4^th Federal Bar Association Section on Taxation annual meeting. Ms. Ciraolo stated:

After three very well-publicized voluntary disclosure programs, nearly 200 criminal prosecutions, ongoing criminal investigations and the increasing assessment and enforcement of substantial civil penalties for failure to report foreign financial accounts, a taxpayer’s claims of ignorance or lack of willfulness in failing to comply with disclosure and reporting obligations are, quite simply, neither credible nor well-received.

The Acting Assistant Attorney General suggests that it would seem extraordinary at this late date that anyone with an unreported offshore bank account could convince IRS that a lack of knowledge on their part was the cause of their non-compliance with the tax filing and reporting obligations.

Her statement, not unreasonable on its face, seems to me to overstate and oversimplify the determination of willfulness versus non-willfulness.

For one thing, the publicity to which the Assistant Attorney General refers, while widespread is not part of the mass media news that most regular people digest. FBAR news and prosecutions is not usually mentioned on the nightly local TV news or reported with great fanfare in the non-financial daily newspapers.

Her statement is most appropriately related to those who opened accounts in tax havens with funds originating in the U.S. and who employed all sorts of devious means to hide their identity from the IRS. These people are not your average ordinary person but are the tax criminals who should have entered the Offshore Voluntary Disclosure Program.

For those in this category who have yet to come forward, the bell is tolling loudly. The IRS having concluded its Swiss Bank Settlement Program with almost 100 banks is shifting its focus to banks in other countries that have assisted U.S. persons with evading tax. These countries of new emphasis include, but are not limited to: The Bahamas, The Cayman Islands, Australia, India, Singapore and Israel.

But, those not committing overt acts in an attempt to evade U.S. tax are not home free. For, civil willfulness does not necessarily require overt acts of commission and the civil FBAR penalty may apply to one who is not a tax criminal. When present, overt acts often represent the nails in the coffin of willfulness, if not establishing a tax crime.

Willfulness for purposes of assessing the draconian FBAR civil penalty can be established by showing knowledge of the obligation to file and intentionally not filing; or, in intentionally burying your head in the sand (willful blindness).

The Streamlined Filling Non-willful certification is all about stating facts that show negligence, even gross negligence, or ignorance, but do not indicate knowledge of the reporting and filing rules and intentionally ignoring them. This analysis is both legal and factual and must delve into all of the facts surrounding the opening and operation of the offshore account – the why, from what source, how, when, where, who, and for how long.

Some examples of facts relating to the non-compliant-non-tax-criminal person, which, if present, might tend to evidence lack of knowledge and intentional non-reporting are:

The person has no post-secondary school education.
The person has a BS and Master’s Degree in Biology or other technical field and not one in taxation or finance with courses in taxation.
The person inherited the account from a parent who lives in the foreign country.
The person did not transfer funds offshore; but, rather the funds in the account originated offshore.
The person has a close connection to the foreign country with family there with frequent visits.
The person works as an IT specialist and has no background or contact with tax issues and international finance.
The person works as a department store clerk or in another non-skilled job.
The person prepared his or her own tax returns and misunderstood the program instructions. I’ve seldom reviewed a self- prepared return with offshore activities reported correctly.
The person is an expatriate living in a high tax country and owes little tax to the U.S.
The person living out of the U.S. has bank accounts only in his or her country of residence which are not viewed by him or her as foreign but as their local bank account.
The person has recently immigrated to the U.S. and has been preoccupied with adapting to the new country, culture, lifestyle, language or a new spouse.
The person who recently immigrated to the U.S came from a country that does not tax its citizens on world-wide income.
The person living in the U.S. or outside of the U.S. has during the filing period suffered severe emotional, medical, family or business hardships.
The person is not a sophisticated investor whose investments consist solely of an employer 401(k) and IRA.
The person’s tax return preparer was a store-front operator who did not inquire about offshore bank accounts or provide a tax organizer to clients.
The person’s return had no Schedule B.

The above list represents but a handful of illustrative facts that combined with other facts might help establish that the non-compliant person’s conduct was not willful. The analysis and determination of what these individual facts collectively mean is a job for a tax attorney experienced in these matters. CPAs, however competent in preparing tax returns, are not trained to decipher this difficult and consequential legal question: Whether a client’s conduct is criminal, willful or negligent. The consequences of getting this determination wrong can be disastrous.

There is no one size fits all solution to offshore noncompliance issues. There are cases in which it is clear that the client has committed tax or other crimes which would likely be charged if uncovered. These individuals cannot file Streamlined or use Reasonable Cause; but, should use the IRS Voluntary Disclosure procedures. In other cases the facts may clearly indicate willful conduct or willful blindness that falls short of criminal conduct. Often the facts are ambivalent, somewhere between reckless which the IRS views as willful and grossly negligent which IRS views as non-willful for purposes of Streamlined Filings. Sorting out these variable fact patterns and suggesting how to proceed is impossible without possessing a full understanding of the available options for mitigating the potential consequences from the client’s non-compliance. The chart above compares Reasonable Cause with Non-willful conduct under the Streamlined Procedures.

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CAUTIONARY TALE FOR POTENTIAL STREAMLINED FILERS AND ADVISORS

Posted on April 23, 2020 by taxpenaltylawyer

The Streamlined Filing Compliance Procedures (Streamlined process or filing)represent a very attractive process by which certain non-compliant taxpayers can come into compliance without penalty (for those living outside of the U.S. who meet a non-residency test) or with a 5 percent miscellaneous offshore penalty for those residing inside the U.S. (that is, who fail to meet the non-residency test).

The Streamlined Process is a special program under which IRS provides a relatively simpler route by which U.S. taxpayers can potentially resolve past tax oversights and become compliant with U.S. tax reporting rules regarding income, foreign bank accounts or other required foreign reporting forms. Basically, the returns and foreign forms are filed with a special Streamlined unit of the IRS who review the package for adequacy on its face and if found adequate are put through for normal return processing with penalty relief.

Eligibility for Streamlined Filing

The program is aimed at taxpayers who are not tax criminals and who meet the following eligibility requirements.

Meet or fail to meet a non-residency test for one of the three streamlined years.
Have filed returns for the past three years for which the due date has passed. Those qualifying as non-residents can file delinquent returns under the program.
Have failed to report the income from a foreign financial account or other foreign source income as required by U.S. tax law and / or failed to file correct FBARs or other foreign reporting forms.
Certify that the failure to report all income, pay all tax and submit all required information returns was due to non-willful conduct. The courts and IRS have defined willfulness as “the intentional violation of a known legal duty.” That phrase is easier to recite than to clarify and IRS has been coy about how aggressively it will review taxpayer certifications of non-willfulness. The test turns on both factual analysis and legal conclusions from those facts. Recently, several courts have held that willfulness includes reckless disregard of the law and IRS rules and return instructions referred to on Form 1040, Schedule B. With regard to eligibility for the Streamlined Process, IRS has the final say. For a fuller discussion of willfulness see my blog post on the-tax-wars.net “Will-O-The Wisp Willfulness in the Streamlined Process “(9/1/14)). This affidavit is the tricky-as-a-maze part of the Streamlined process that requires great care, thought and legal skills to navigate without subjecting the filer to enhanced risks of criminal charges.

Attractiveness of Streamlined Process

The program beneficial for most who qualify because the Streamlined Process:

Allows one to come into compliance by filing only three years of returns and six years of FBARS instead of six years of returns required under the existing Voluntary Disclosure Procedures (VDP).
Avoids the VDP harsher penalty regime which would be inappropriate for those who are not tax criminals or reckless or willful violators and in all fairness should not be subject to the maximum FBAR penalties or, for willful violations or harsh penalties for failure to file Form 3520. Instead, the Streamlined Process for U.S. persons allows you to come into compliance by paying a reduced miscellaneous offshore penalty of 5 percent of the highest balance of noncompliant foreign financial assets (required to be reported in an FBAR or on Form 8938 or reported but income not reported) during a six year look back period but no other penalties such as the accuracy-related penalty (can be 20%) on any increased income tax liability or 3520 penalty (can be 25% of value of unreported trust assets). Those qualifying as living outside of the U.S. pay no penalty at all.
Removes the cloud of fear hanging over one’s head about discovery of the non-compliance and possible passport denial or revocation.
Brings one into compliance without identifying him or her as a tax-violator and without disclosing to the public that he or she has entered the program.

Uncertainty Associated with Streamlined Filings

Unlike the VDP, one does not initially know if IRS has accepted him or her into the Streamlined Process. While an IRS audit of Streamlined returns will not be automatic, returns may be selected for audit under normal IRS audit guidelines and IRS may determine that one’s conduct, in its eyes, was not non-willful. In that case, IRS could go back further than three years and could assert an FBAR penalty at the conclusion of the audit process. The IRS would have to act within the period allowed under law for making income tax assessments, normally three years unless large amounts of income (more than 25% of all income reported) are found to have not been reported in your returns. This limitations period on making assessments would start to run from the filing date of your original or delinquent returns. These limitations periods, however, do not apply to a year for which IRS successfully proves that fraud was committed in filing the return. The limitations period for IRS assessing the FBAR civil penalty is six years from the due date of the particular FBAR. For a fuller discussion of the impact of limitations periods, read my blog post on www.the-tax-wars.net “Statutes of Limitations and Streamlined Filings or File Forward Strategies” (8/10/15).

Linchpin of Safely Filing under Streamlined Process

Streamlined filings are safe provided the following rules are strictly observed:

Provide only truthful and accurate information in the required Non-willful statement or affidavit.
Make the affidavit (i.e., it is filed under penalties of perjury) completely transparent, including facts all relevant known facts, even those that may suggest willfulness, with an explanation, if required.
Distinguish between facts that are known from documents and memory or recollections of past events.
Have an experienced tax attorney prepare the non-willful affidavit and make the decision whether conduct described is non-willful conduct.
Remember that statements in the non-willful affidavit are legal admissions. Do not inadvertently and ignorantly admit to a chargeable crime or you may find yourself so charged.

Dangerous Streamlined Filing

Whether a taxpayer’s conduct is non-willful requires a factual and legal analysis to determine where the taxpayer’s conduct falls on an imaginary ladder of culpability. The ladder shows the most culpable conduct at the top rung and the least culpable conduct at the bottom rungs. From the top down the ladder appears:

Criminal conduct.
Civilly willful conduct.
Reckless disregard conduct.
Non-willful conduct.
Grossly negligent conduct.
Negligence
Ignorance of the law

A taxpayer will qualify for Streamlined filing relief if they are ignorant of the law, negligent, grossly negligent or non-willful. Only an experienced tax attorney has the training and experience to distinguish between the categories of conduct listed above. Often a taxpayer’s conduct will fall in the cracks between categories of grossly negligent, non-willful, reckless or willful. Only an experienced tax lawyer will know the questions to ask the client to root out all of the relevant facts necessary to make a proper non-willful decision.

I’ve had been told that there are CPAs who are preparing non-willful affidavits for clients making Streamlined filings. In doing so, they are subjecting their clients to unknowing risks of being charged with making a false Streamlined claim of non-willfulness or even worse of unwittingly admitting to a crime or committing perjury. They are also inviting malpractice claims because practicing out of license (unlawful practice of law) is per se negligent.

CPA Indicted for foolhardy Streamlined Filing Caper

CPA Brian Nelson Booker prepared his own Streamlined filing. He should have hired legal counsel. He would certainly have been told that his conduct was willful and therefore he should not attempt a Streamlined filing. A Voluntary Disclosure would have been more suitable for his situation. The rueful facts of his indictment can be found in U.S. v. Brian Nelson Booker Case O: 19 Cr. 60152 (S.D. Fla.).

Lesson: Tax criminal cannot sneak into a lower penalty regime through the Streamlined Process. IRS is on the watch for such people. You cannot turn bad chop-meat into a wholesome meal. And, it is not always easy to determine if the chop-meat is bad. A CPA will not know. He or she may have the client sail off unaware of a hidden bomb aboard the Streamlined ship. A bomb of willfulness, which, if triggered, will take both the client and CPA to the bottom.

Robert S. Steinberg, Esquire
www.steinbergtaxlaw.com

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OVDP TO END ON SEPT. 28, 2018 – ACT NOW ON UNDISCLOSED OFFSHORE ACCOUNTS

Posted on March 13, 2018 by taxpenaltylawyer

I don’t often post verbatim complete IRS pronouncements. This post is an exception, however, because the IRS Newswire Issue reprinted below contains an urgent message for those with unreported offshore income and / or foreign financial accounts who have not yet taken action to come into compliance. After September 28, the safest means of coming into compliance with certainty as to no criminal charges being filed and a predetermined penalty regime will be off the table. The options remaining after September 28 will be less certain and therefore more risky.

IRS NEWSWIRE

Issue Number: IR-2018-52

Inside This Issue

IRS to end offshore voluntary disclosure program; Taxpayers with undisclosed foreign assets urged to come forward now

WASHINGTON – The Internal Revenue Service today announced it will begin to ramp down the 2014 Offshore Voluntary Disclosure Program (OVDP) and close the program on Sept. 28, 2018. By alerting taxpayers now, the IRS intends that any U.S. taxpayers with undisclosed foreign financial assets have time to use the OVDP before the program closes.

“Taxpayers have had several years to come into compliance with U.S. tax laws under this program,” said Acting IRS Commissioner David Kautter. “All along, we have been clear that we would close the program at the appropriate time, and we have reached that point. Those who still wish to come forward have time to do so.”

Since the OVDP’s initial launch in 2009, more than 56,000 taxpayers have used one of the programs to comply voluntarily. All told, those taxpayers paid a total of $11.1 billion in back taxes, interest and penalties. The planned end of the current OVDP also reflects advances in third-party reporting and increased awareness of U.S. taxpayers of their offshore tax and reporting obligations.

The number of taxpayer disclosures under the OVDP peaked in 2011, when about 18,000 people came forward. The number steadily declined through the years, falling to only 600 disclosures in 2017.

The current OVDP began in 2014 and is a modified version of the OVDP launched in 2012, which followed voluntary programs offered in 2011 and 2009. The programs have enabled U.S. taxpayers to voluntarily resolve past non-compliance related to unreported foreign financial assets and failure to file foreign information returns.

Tax Enforcement

The IRS notes that it will continue to use tools besides voluntary disclosure to combat offshore tax avoidance, including taxpayer education, Whistleblower leads, civil examination and criminal prosecution. Since 2009, IRS Criminal Investigation has indicted 1,545 taxpayers on criminal violations related to international activities, of which 671 taxpayers were indicted on international criminal tax violations.

“The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts with the use of information resources and increased data analytics,” said Don Fort, Chief, IRS Criminal Investigation. “Stopping offshore tax noncompliance remains a top priority of the IRS.”

Streamlined Procedures and Other Options

A separate program, the Streamlined Filing Compliance Procedures, for taxpayers who might not have been aware of their filing obligations, has helped about 65,000 additional taxpayers come into compliance. The Streamlined Filing Compliance Procedures will remain in place and available to eligible taxpayers. As with OVDP, the IRS has said it may end the Streamlined Filing Compliance Procedures at some point.

The implementation of the Foreign Account Tax Compliance Act (FATCA) and the ongoing efforts of the IRS and the Department of Justice to ensure compliance by those with U.S. tax obligations have raised awareness of U.S. tax and information reporting obligations with respect to undisclosed foreign financial assets. Because the circumstances of taxpayers with foreign financial assets vary widely, the IRS will continue offering the following options for addressing previous failures to comply with U.S. tax and information return obligations with respect to those assets:

IRS-Criminal Investigation Voluntary Disclosure Program;
Streamlined Filing Compliance Procedures;
Delinquent FBAR submission procedures; and
Delinquent international information return submission procedures.

Full details of the options available for U.S. taxpayers with undisclosed foreign financial assets can be found on IRS.gov.

RSS ADDITIONAL COMMENT

How one with unreported offshore income and / or undisclosed foreign financial accounts should proceed depends upon a person’s particular facts and circumstances. There is no one-size-fits-all solution to offshore noncompliance problems. If you still have unresolved offshore compliance issues call my office for a consultation while all options remain available. After September 28, choices will narrow and become less friendly for many.

Robert S. Steinberg, Esquire*
www.steinbergtaxlaw.com

*Peer Rated AV Preeminent® for Highest Level of Professional Excellence by Martindale-Hubbell since 2002 (Note: AV® and AV Preeminent® are Certification Marks used under license in accordance with the Martindale-Hubbell® certification procedures, standards and policies (www.martindale.com/ratings)).

Posted in OFFSHORE VOLUNTARY DISCLOSURE PROGRAM, Uncategorized | Tagged DELINQUENT FBARS, DELINQUENT FOREIGN REPORTING FORMS, FBARS, FOREIGN BANK ACCOUNT REPORTING, OFFSHORE VOLUNTARY DISCLOSURE PROGRAM ENDING, OVDP ENDING, UNREPORTED OFFSHORE INCOME, VOLUNTARY DISCLOSURE | Leave a comment

PARADISE LOST: THE “PARADISE PAPERS LEAK REVEALS MODERN DIGITAL AGE TRUTHS – (1) ALL FINANCIAL RECORD CAN BE HACKED. 92) THERE ARE NO CYBER SECRETS. AN OVDP SOLUTION FOR OFFSHORE NONCOMPLIANCE

Posted on November 8, 2017 by taxpenaltylawyer

In John Milton’s epic biblical poem “Paradise Lost,” the fall of Man is depicted. The Devil is banished to Hell. The Modern Wealthy Man has had his own fall. The morality-play today devolves around tax-evasion and the loss of privacy. Keeping one’s financial affairs secret from the masses, sometimes for good cause such as to protect personal safety, but often for more shady reasons like the evasion of tax obligations, is no longer a certainty.

After the Panama Papers were disseminated, no one with a sane mind would have continued to believe that offshore financial accounts in Tax Haven jurisdictions could continue to perfectly wall-off one’s financial affairs from public scrutiny. Now comes the Paradise Papers to reinforce that point for any remaining non-believers.

The Paradise Papers were obtained by the German newspaper Suddeutsche Zeitung which called in the International Consortium of Investigative Journalists to head the inquiry.

Like the Panama Papers the obtained documents reveal financial dealings of many wealthy political leaders, celebrities and other extremely wealthy individuals. Even the Queen of England’s financial affairs were revealed in the leak.

What is lost in these revelations? The Paradise Lost is privacy and secrecy. They simply do not exist anymore for information trusted to computer networks or cloud-based applications.

Very sophisticated hacker-groups are determined to obtain such information, no less governmental tax authorities. Does this mean we are likely to go back to paper documents stored in rusting file cabinets? Certainly not for most transactions, although I have read that certain spy agencies are employing typewritten again in their spy-craft.

What this does mean for U.S. non-compliant taxpayers is that their foreign financial accounts long hidden away in some remote tax haven jurisdiction are no longer safely hidden away that they will never be found-out.

If such accounts beneficially owned or controlled by U.S. citizens or resident aliens, are uncovered by the IRS and Department of Justice, the resultant criminal and civil sanctions may well feel like Hell.

So, the question is: What to do? The options are limited.

One may continue to imitate an ostrich – stick one’s head in the sand and wish for non-discovery, like those poor souls who knew they should have left Europe during World War II but waited too long and fell under Nazi occupation. The tragic consequences of those indecisions are well known.

The consequences of tax non-compliance today are less tragic but harsh enough: at a minimum severe or draconian amounts to pay for tax, penalty and interest; and, the distinct possibility of incarceration for tax crimes committed, no less, the embarrassment and shame of reputation that goes along with becoming a felon.

The above, sounding not particularly too palatable, the question still sits on the table, “What to do?”

Fortunately, there is a course of action that both caps the adverse financial consequences of one’s tax non-compliance and affords amnesty from criminal prosecution. This result can be accomplished by entering an IRS / DOJ amnesty program called The Offshore Voluntary Disclosure Program or OVDP.

The OVDP is a special program under which IRS settles all potential criminal and civil tax issues relating to unreported offshore financial accounts under a specified civil penalty regime that is less severe than the maximum civil penalties that could be asserted by IRS outside of the program, were you audited, but in some cases more severe than the lowest level of civil penalties that IRS would assert outside of the program. In the OVDP, IRS also grants immunity from any criminal charges that otherwise might arise from the non-reporting.

The OVDP has several beneficial features, namely:

Offers certainty that you will not be charged with a crime and that the civil FBAR penalty will be no more than 27.5% (50% if any account is with certain identified banks or facilitators under investigation) of the highest aggregate value in U.S. dollars of your offshore accounts during the OVDP period discussed below.
Allows you to repatriate and use offshore funds remaining after paying the tax and penalties and / or have funds owned by your parents remitted to them.
Removes the cloud of fear handing over you about discovery of the non-compliance.
Does all of the above without tainting your name, identifying you as a tax-violator and without disclosing to the public that you have entered the program.

The OVDP is a process that is completed in phases:

Submit your name or names to the Criminal Investigation Division (CID) of IRS and CID will send notification by fax if your name or names are cleared or if you are already under audit consideration or have already been identified. In the latter instance, you will not be eligible to participate in OVDP and likely will be audited by IRS which could result in civil penalties more severe or less severe than are offered in OVDP and or criminal sanctions for all or some of you.
Assuming your name clears CID, you will then submit a detailed OVDP Letter and Attachment for each foreign account to CID. The information required by this letter and the attachments is quite detailed and may take some time to gather, organize and relate in a coherent, accurate narrative. The letter must be completely truthful and submitted within 45 days of initial clearance of your name by CID CID will then notify by mail whether you have been provisionally accepted into the program.
Following provisional acceptance, you will submit within 90 days, a more detailed package of amended returns with supporting documentation. Your case will then be assigned to an examiner by the IRS Philadelphia Service Center for review and certification. This is not equivalent to a full-blown audit and usually goes smoothly but sometimes requests for clarification or additional information or documentation are made. Checks for the FBAR penalty and for the income tax, accuracy related penalty and interest due must also be submitted at this time.
The additional package will include amended returns and Amended FBARs (TD Form 90.22-1 or FinCEN 114) for each year of the OVDP period (8 years). The OVDP period is determined by income tax returns delinquent or requiring amendment. If any tax returns have not yet filed, such returns, if required, will be included with the OVDP submission.
Once the OVDP review is complete you will sign a contract with IRS stating the income tax, accuracy related and FBAR penalties and interest owed and paid. This contract called a “Closing Agreement” is binding on IRS unless it is later found that you fraudulently misrepresented facts in your submission. The IRS can still audit your returns on domestic tax issues, but that is not a common occurrence unless controversial domestic issues are raised in the returns. Thus, the “Closing Agreement” and payment of tax, penalty and interest should end the matter.

In addition to the OVDP penalty, there will be income tax to pay on unreported income, a substantial underpayment or accuracy related penalty of 20% of the additional tax, and a failure to pay penalty of up to 25% applied to the unpaid tax plus accrued interest.

Even if accepted into the OVDP, you have the option of opting-out of the program and seeking a lower FBAR civil penalty while preserving the OVDP criminal immunity. Opting-out, however, can result in a higher as well as lower civil FBAR penalty and can result in higher income taxes and income tax penalties being asserted by IRS. Thus, opting-out sometimes presents potential monetary benefits but poses additional risks not present if one remains in the OVDP.

To be eligible for the OVDP one must act propitiously. Once IRS or the DOJ has your name as being noncompliant you become ineligible for the program.

Thus, I strongly urge individuals still out of compliance with U.S. tax law regarding foreign financial accounts to consult with a tax attorney experienced in these matters.

I, of course, am available for such representation. There are other post on this blog-site dealing with various aspects of the OVDP and Streamlined Filing Compliance Procedures, another IRS program, for taxpayers whose noncompliance was not willful.

My credentials, experience and publications may be found on my website www.steinbergtaxlaw.com

Posted in Uncategorized | Leave a comment

DEPARTMENT OF JUSTICE ANNOUNCES FBAR GUILTY PLEA OF GREEN CARD HOLDER

Posted on November 3, 2017 by taxpenaltylawyer

On October 26, 2017, Hyung Kwon Kim (Kim), a Greenwich, Connecticut man pleaded guilty to failing to report funds he maintained in foreign bank accounts to the Department of Treasury. The DOJ Press Release was announced Acting Deputy Assistant Attorney General Stuart M. Goldberg of the Justice Department’s Tax Division, U.S. Attorney Dana J. Boente for the Eastern District of Virginia, and Chief Don Fort, IRS Criminal Investigation.

U.S. citizens, resident aliens, and permanent legal residents with a foreign financial interest in or signatory authority over a foreign financial account worth more than $10,000 are required to file a Report of Foreign Bank and Financial Accounts, commonly known as an FBAR, disclosing the account. Kim did not obey the law.

Acting Deputy Assistant Attorney General Goldberg discussed the plea:

For more than a decade … Kim concealed his wealth in secret offshore accounts, evading reporting requirements and the payment of income taxes due,” With his guilty plea, he is now held to account for his criminal conduct. Offshore tax evasion is a top priority for the Tax Division, and we will continue to work with our partners at IRS to follow the money and actively pursue those who persist in thinking that they can safely hide their income and assets offshore.

Court documents and information provided in court, reveal the actions that got Kim into trouble and resulted in his guilty plea:

Kim is a citizen of South Korea and, since 1998, a legal permanent resident (Green Card Holder) of the United States.
Kim resided in Massachusetts and later in Connecticut.
Around 1998, Kim traveled to Switzerland to identify financial institutions at which to open accounts for the purpose of receiving transfers of funds from another individual in Hong Kong.
Over the next few years, Kim opened accounts at several banks, including Credit Suisse, UBS, Bank Leu, Clariden Leu, and Bank Hofmann. In 2004, the value of the funds in Kim’s accounts exceeded $28 million.
Kim conspired with several bankers, including Dr. Edgar H. Paltzer, to conceal the funds from U.S. authorities.
Paltzer, who was convicted in 2013 in the Southern District of New York for conspiring to defraud the United States, and the other bankers assisted Kim in opening accounts in the names of sham entities organized in Liechtenstein, Panama and the British Virgin Islands.
Paltzer and the other bankers facilitated financial transactions for Kim, so that Kim could use the funds in the United States. For example, between 2003 and 2004, Kim directed Paltzer and another banker to issue nearly $3 million in checks payable to third parties in the United States for the purchase of a residence in Greenwich, Connecticut. In 2005,
Kim created a nominee entity to hold title for the purchase of another home on Stage Harbor in Chatham, Massachusetts, for nearly $5 million. Kim and Paltzer communicated about the purchase in a manner that created the appearance that Kim was renting the property from a fictitious owner.
Between 2000 and 2008, Kim took multiple trips to Zurich, Switzerland and withdrew more than $600,000 in cash during these visits.
Kim also brought his offshore assets back to the United States by purchasing millions of dollars’ worth of jewelry and loose gems. For example, in 2008, Kim purchased an 8.6 carat ruby ring from a jeweler in Greenwich, Connecticut, which he financed by causing Bank Leu to issue three checks totaling $2.2 million to the jeweler.
In 2008, during a trip to Zurich, Kim’s banker at Clariden Leu informed Kim that due to ongoing investigations in the United States, Kim could either disclose the accounts to the U.S. government, spend the funds, or move the funds to another institution.
Kim moved the funds into nominee accounts at another bank. In 2011, Kim liquidated the accounts by, among other things, withdrawing tens of thousands of dollars in cash and purchasing three loose diamonds for about $1.7 million from the Greenwich jeweler.
Kim also admitted that from 2000 through 2011, he filed false income tax returns for 1999 through 2010, on which he failed to report income from the assets held in the foreign financial accounts that he owned and controlled in Switzerland.

As part of his plea agreement, Kim will pay a civil penalty of over $14 million dollars to the United States Treasury for failing to file, and filing false, FBARs, which is separate from any restitution the Court may order.

Don Fort, Chief of IRS Criminal Investigation commented on the plea:

Mr. Kim’s plea is another example of what happens to those who dodge their tax obligations by utilizing offshore tax havens. We owe it to the vast majority of honest U.S. taxpayers to tirelessly search for and prosecute those who avoid paying their fair share, regardless of how they may try to disguise their income.

Kim’s sentencing is scheduled for Jan. 26, 2018 before U.S. District Court Judge T.S. Ellis III. Kim faces a statutory maximum sentence of five years in prison. He also faces a period of supervised release, restitution, and monetary penalties, in addition to the FBAR penalty.

RSS COMMENTS

Kim’s case provides examples of the sort of overt acts that will provide evidence of criminal intent.
Kim’s downfall is a classic example of a taxpayer who could have averted criminal sanctions by entering the Offshore Voluntary Disclosure Program (OVDP).
The OVDP is still open but IRS and the DOJ have indicated it may soon be coming to an end.

Those of a mind to avoid the fate of Hyung Kwon Kim should consult with an experienced offshore tax attorney to consider alternatives for comming into compliance with the minimum of risk and cost.

Posted in FBAR PENALTIES, OFFSHORE VOLUNTARY DISCLOSURE PROGRAM, Uncategorized | Tagged CRIMINAL OVERT ACTS, EVIDENCE OF CRIMINAL INTENT, FBAR GUILTY PLEA, FBAR PENALTY, FBAR VIOLATIONS, OVDP, WILLFUL FBAR NON FILING | Leave a comment

THE HOUSE TAX REFORM BILL WOULD REPEAL THE ALIMONY DEDUCTION

Posted on November 3, 2017 by taxpenaltylawyer

The House of Representatives has revealed its Tax Reform Plan encapsulated in The Tax Cuts and Jobs Act (HR 1)

The House Committee on Ways and Means Section by Section Summary describes the provision on Alimony as follows:

Sec. 1309. Repeal of deduction for alimony payments.

Current law: Under current law, alimony payments generally are an above-the line deduction for the payor and included in the income of the payee. However, alimony payments are no deductible by the payor or includible in the income of the payee if designated as such by the divorce decree or separation agreement.

Provision: Under the provision, alimony payments would not be deductible by the payor or includible in the income of the payee. The provision would be effective for any divorce decree or separation agreement executed after 2017 and to any modification after 2017 of any such instrument executed before such date if expressly provided for by such modification.

Considerations:

The provision would eliminate what is effectively a “divorce subsidy” under current law, in that a divorced couple can often achieve a better tax result for payments between them than a married couple can.
The provision recognizes that the provision of spousal support as a consequence of a divorce or separation should have the same tax treatment as the provision of spousal support within the context of a married couple, as well as the provision of child support.

JCT estimate: According to JCT, the provision would increase revenues by $8.3 billion over 2018-2027.

RSS COMMENTS:

The alimony deduction is not really a divorce subsidy. Rather, the deduction reflects that a portion of the payor spouse’s gross income has been shifted to the payee spouse. Absent a deduction the payor spouse will be required to pay tax on income he or she will not have available for his or her own support. To say that this situation is the same as the payment of spousal support during the marriage is inaccurate. During the marriage the spouses live under one roof. After the divorce the spouses must maintain two separate households. The only present tax revenue impact of alimony payments is a rate arbitrage benefit if the payee spouse is in a lower tax bracket than the payor spouse.
The Joint Committee on Taxation (JCT) estimate of tax savings from the Bill also seems questionable. Should this provision become law, alimony payments will simply be reduced to reflect the fact that the payor spouse is paying the income tax on the payee spouse’s alimony payments. Negotiations over support will become more complicated.

Posted in DIVORCE, DIVORCE TAX, Uncategorized | Tagged GOP TAX REFORM BILL, PROPOSED REPEAL OF ALIMONY DEDUCTION, TAX CUTS AND JOBS ACT | Leave a comment

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