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Case Resolution

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    Q49: If the taxpayer and the IRS cannot agree to the terms of the 2011 OVDI closing agreement, will mediation with Appeals be an option with respect to the terms of the closing agreement?

    A49: No. The penalty framework and the agreement to limit tax exposure to years 2003 through 2010 are package terms under the 2011 OVDI. If any part of the offshore penalty is unacceptable to the taxpayer, the case will be examined and all applicable penalties will be imposed (see FAQ 51). After a full examination, any tax and penalties imposed by the Service on examination may be appealed, but the Service’s decision on the terms of the 2011 OVDI closing agreement may not.

    Q50: Will examiners have any discretion to settle cases?

    A50: No. Voluntary disclosure examiners do not have discretion to settle cases for amounts less than what is properly due and owing. However, because the 25 percent offshore penalty is a proxy for the FBAR penalty, other penalties imposed under the Internal Revenue Code, and potential liabilities for years prior to 2003, there may be cases where a taxpayer making a voluntary disclosure would owe less if the special offshore initiative did not exist. Under no circumstances will taxpayers be required to pay a penalty greater than what they would otherwise be liable for under the maximum penalties imposed under existing statutes. For example, if a taxpayer had $100,000 in an offshore bank account in only one year and foreign income-producing real estate with a fair market value of $1,000,000, only the bank account would be subject to the FBAR penalty.

    Consequently, the maximum FBAR penalty would only be $50,000, substantially less than the offshore penalty of $275,000 (25% of $1,100,000). If this FBAR penalty, plus tax, interest and all other applicable penalties, are less than what is due under this offshore initiative, the taxpayer will only pay the lesser amount.

    Examiners will compare the amount due under this offshore initiative to the tax, interest, and applicable penalties (at their maximum levels and without regard to issues relating to reasonable cause, willfulness, mitigation factors, or other circumstances that may reduce liability) for all open years that a taxpayer would owe in the absence of the 2011 OVDI penalty regime. The taxpayer will pay the lesser amount. If the taxpayer disagrees with the result, the taxpayer may request that the case be referred for an examination of all relevant years and issues (see FAQ 51).

    Q51: If, after making a voluntary disclosure, a taxpayer disagrees with the application of the offshore penalty, what can the taxpayer do?

    A51: If the offshore penalty is unacceptable to a taxpayer, that taxpayer must indicate in writing the decision to withdraw from the program. Once made, this election is irrevocable. At that point, the examiner and manager will consider the facts of the case and how the audit process will proceed. In referring the case for examination, the examiner and manager will decide whether to refer the case for a normal examination or to a Special Enforcement Program agent.

    In considering the facts of the case and referring the case for examination, the examiner and manager will consult with technical advisors. All relevant years and issues will be subject to a complete examination. At the conclusion of the examination, all applicable penalties will be imposed. Those penalties could be substantially greater than the 25 percent penalty (see FAQ 5). If the case is unagreed, the taxpayer will have recourse to Appeals.

    Taxpayers are reminded, that even after opting out of the Service’s civil settlement initiative, they remain within Criminal Investigation’s Voluntary Disclosure Practice. Therefore, they are still required to cooperate fully with the agent by providing all requested information and records and must still pay or make arrangements to pay the tax, interest, and penalties they are ultimately determined to owe. If a taxpayer does not cooperate or make payment arrangements, the case may be referred back to Criminal Investigation.

    Q52: Under what circumstances would a taxpayer making a voluntary disclosure under this initiative qualify for a reduced 5 percent offshore penalty?

    A52: Unless the taxpayer qualifies for a lesser payment as calculated under FAQ 50, taxpayers making voluntary disclosures who fall into one of the two categories described below will qualify for a 5 percent offshore penalty. Examiners have no authority to negotiate a different offshore penalty percentage.

    1. Taxpayers who meet all four of the following conditions:
      1. did not open or cause the account to be opened (unless the bank required that a new account be opened, rather than allowing a change in ownership of an existing account, upon the death of the owner of the account);
      2. have exercised minimal, infrequent contact with the account, for example, to request the account balance, or update accountholder information such as a change in address, contact person, or email address;
      3. have, except for a withdrawal closing the account and transferring the funds to an account in the United States not withdrawn more than $1,000 from the account in any year covered by the voluntary disclosure;
      4. and can establish that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation).

      For funds deposited before January 1, 1991, if no information is available to establish whether such funds were appropriately taxed, it will be presumed that they were.

      • Example 1: When the taxpayer’s father died, the taxpayer inherited two offshore accounts in a foreign jurisdiction. His father’s last deposit to the accounts was more than 30 years ago. The taxpayer provided his email address to the bank and received bank statements by email. Twice he has been to the foreign jurisdiction and talked to a banker-during one of those visits he withdrew $1,000 from one of the accounts. Otherwise, he did not withdraw any money from the accounts until last year, when he closed the accounts and repatriated the money to a U.S. bank. He never reported earnings on the accounts on his U.S. tax returns and he never filed an FBAR. He is entitled to the reduced 5% offshore penalty.
      • Example 2: The facts are the same as in example 1, except that $40,000 of the funds were deposited to one of the accounts in 1995. The taxpayer would have to identify the source of the deposit and, if the source was taxable in the U.S., prove that U.S. income tax was paid on those funds. In the absence of such proof, the taxpayer is not entitled to the reduced 5% offshore penalty.
      • Example 3: The facts are the same as in example 1, except that the taxpayer gave the bank instructions on how to invest the funds in the accounts and signed a “hold mail” agreement to prevent the mailing of statements to the U.S. The taxpayer is not entitled to the reduced 5% offshore penalty.
    2. Taxpayers who are foreign residents and who were unaware they were U.S. citizens.
      • Example 1: The taxpayer was born in the U.S. to parents of foreign citizenship. She grew up in a foreign jurisdiction, unaware that she had been born in the U.S. She has a $60,000 account in the foreign jurisdiction. She has never filed U.S. returns or FBARs. She became aware she was a U.S. citizen when she had to get a birth certificate in order to obtain a passport from the foreign jurisdiction where she resides. She is entitled to the reduced 5% offshore penalty.
      • Example 2: The facts are the same as in example 1, except that the taxpayer always knew she was a U.S. citizen and never inquired about her U.S. tax obligations. The taxpayer is not entitled to the reduced 5% offshore penalty.

    Q53: Under what circumstances would a taxpayer making a voluntary disclosure under this initiative qualify for a reduced 12.5 percent offshore penalty?

    A53: Unless the taxpayer qualifies for a lesser payment as calculated under FAQ 50 or a 5 percent offshore penalty under FAQ 52, taxpayers whose highest aggregate account balance (including the fair market value of assets in undisclosed offshore entities and the fair market value of any foreign assets that were either acquired with improperly untaxed funds or produced improperly untaxed income) in each of the years covered by the 2011 OVDI is less than $75,000 will qualify for a 12.5 percent offshore penalty. As in other cases, examiners have no authority to negotiate a different offshore penalty percentage.

    • Example 1: The taxpayer was born in a foreign jurisdiction and is now a U.S. citizen. He has a landscaping business in the U.S. He sends money to an account in the foreign jurisdiction that he owns jointly with his mother (who is a resident of that jurisdiction). The account never has more than $75,000 in it. He has never filed an FBAR or paid U.S. tax on the earnings from the account. He is entitled to the reduced 12.5% offshore penalty. The result would be the same for taxpayers who are U.S. citizens by birth.
    • Example 2: The facts are the same as in example 1, except that the taxpayer made a deposit to the account in 2005 that briefly brought the account balance to $78,000. Because the highest account balance during the years covered by the 2011 OVDI was greater than $75,000, the taxpayer is not entitled to the reduced 12.5% offshore penalty.

    IRS detection of previously undisclosed foreign accounts held by US taxpayers is just a matter of time!

    The IRS is attempting to close a perceived $300 billion tax gap that has been plaguing the federal government for the past several years. They’ve invested $20 billion in a Foreign Bank Account Reporting (FBAR) program designed to thwart efforts by US citizens to commit income tax evasion by underreporting U.S. income and then hiding the cash related to the unreported income in undisclosed Foreign Bank Accounts. In addition the IRS has expanded in sheer size by 40% over the last few years in response to this issue.

    As part of this FBAR program, which has included the use of paid whistleblowers like Bradley Birkenfeld who blew the whistle on UBS by stealing and then selling US account holders names to the US government and the copy cats that are certain to follow, the IRS is attempting to catch income tax evaders. Recently, HSBC, Europe’s biggest bank, reported that data on up to 24,000 Swiss client accounts had been stolen by a former employee and ended up in the hands of authorities in France, where the ex-worker fled.

    U.S. authorities are currently rumored to be negotiating with the French through a treaty request to get the names of any U.S. HSBC clients involved. Following on the heals of this news on HSBC, Linda J. Osuna, an IRS Special Agent in Charge of the Tampa Field Office, told reporters that the U.S. was building a case against an unnamed foreign bank, which she declined to name, for “the same behavior that got UBS in trouble.” The HSBC events are unfolding just like the events that led to the prosecution of UBS even through at present no official accusation of wrong doing against HSBC has been brought forth by the U.S. Government.

    The unnamed foreign bank about to be sued by the U.S. Government could have also been identified as part of the approximately 15,000 voluntary disclosures submitted by U.S. citizens with offshore accounts who came clean under a voluntary amnesty program that ended on October 15, 2009. Since October 15, 2009 the IRS has been culling through these voluntary disclosures which apparently have provided the IRS a treasure trove of information with which to identify other institutions that have encouraged income tax evasion in the same or similar manner as UBS had.

    Here are some other recent events that point toward the IRS discovering non-complaint foreign accounts on its own:

    • The G20 called for action “to make it easier for developing countries to secure the benefits of the new co-operative tax environment, including a multilateral approach for the exchange of information.” In response the OECD and the Council of Europe developed a Protocol amending the multilateral Convention on Mutual Administrative Assistance in Tax Matters to bring it in line with the international standard on exchange of information for tax purposes and to open it up to all countries
    • The United States and other nations have signed an OECD sponsored agreement that strengthened the provisions on international information exchange in tax cases.
    • “Other serious tax crimes,” has been added to the list of predicate offenses that constitute an international financial crime.
    • Implementation of FATCA

    For more information, click here to view a summary of potential reporting requirements and civil penalties that could apply to a taxpayer, depending on his or her particular facts and circumstances.


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