catching up* / us tax and fbar compliance

Report
“CATCHING UP” /
US TAX AND FBAR COMPLIANCE
ACA Town Hall Meeting
London
27 November 2013
Charles M Bruce
Stéphane Lagonico
Guillaume Grisel
[email protected]
[email protected]
[email protected]
8, rue du Grand-Chêne
CH-1002 Lausanne
For additional information, call Guillaume Grisel at +41 21 348 1188 (General) or
+41 21 348 1178 (Direct)
1
Obligations to Report – Stating the
Obvious
• US citizens, “green card” holders, resident aliens
• Have to file federal tax returns (if gross income,
for ex., at least $9,750, under 65; varies by filing
status; increases each year)
• Have to file Foreign Bank Account Report (FBAR)
(if aggregate value of foreign accounts exceeds
$10,000)
• All this regardless where they reside
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Many Americans Abroad Are Not
Compliant -- No Secret Here
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Estimated 6 million-7 million American taxpayers abroad. Approximately 1
million file (450,000 file Form 2555 (Foreign Earned Income Form) and 550,000
file Form 1116 (Foreign Tax Credit Form). [2011 figures.]
Almost certainly a significant number of non-filers (1.8 million or more?).
Size of the “Tax Gap” (tax dollars not collected) approximately $5.4 billion.
[Educated guess.]
GAO study due by yearend may contain new estimates.
Many things building pressure to do something rather than wait to get caught:
Department of Justice’s prosecution of undeclared account holders and foreign
banks; increased exchange of information; John Doe Summonses;
“Whistleblower” Program; banks’ heightened due diligence/Know-YourCustomer practices; FATCA; others.
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How Can I Catch Up?
First Thoughts
You should catch up for many reasons;
Don’t procrastinate;
Do your own research and then immediately get some
advice;
Shop around for advisors and, in the process, learn a lot;
Don’t “vote” as to which approach to follow until you see
or get a feel for your numbers – for tax liabilities,
penalties, interest, FBAR penalty.
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What Are My Alternatives?
• Do nothing and hope you don’t get caught. Knowing that you must file,
you are committing criminal tax fraud. If you try to lie your way out of the
problem, you have committed additional felonies. Not a good idea. Don’t
“augur” yourself.
• Make a voluntary disclosure under the IRS 2012 Offshore Voluntary
Disclosure Program. [Slides 6-11] See http://www.irs.gov/uac/2012Offshore-Voluntary-Disclosure-Program.
– Squeeze within the 5% rule if you can
– Opt out if the result is not palatable and you have good “reasonable
cause” arguments
• Or, if you can qualify, make a voluntary disclosure under the relatively new
IRS “Streamlined” procedures.
• Or, make a so-called “quiet disclosure”. But this is rolling the dice. Again,
hope you don’t get caught.
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Make a Voluntary Disclosure
Next 6 Slides –This will be painful!
• Who Is Eligible? US taxpayers residing anywhere. Can’t have serious
other problems and can’t be previously disclosed to IRS. Normally,
individuals but can be corporation, partnership, trust. Can’t be under
examination. Must be element of undisclosed foreign income or
accounts. Not for domestic cases; can be mixed foreign and domestic.
• Married Couples: Can proceed separately or together.
• Years Covered: Most recent 8 years as to which noncompliance.
• Years of Tax Returns and FBARs: Most recent 8 years as to which
noncompliance.
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Make a Voluntary Disclosure
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Passive Foreign Investment Company (PFIC) Rules: Optional “shortcut” method
is available.
Pre-Clearance: Yes. Done to ensure that taxpayer will not be treated as
ineligible.
Acceptance: Criminal Investigation screens and ordinarily accepts usually within
45 days.
Submission of Documents: Previously filed original returns omitting income,
previously filed returns for any compliant years, delinquent returns, amended
returns, Foreign Account or Asset Statement for each undisclosed foreign
account or asset, Taxpayer Account Summary With Penalty Calculation
(information drawn from FBARs and signed by taxpayer and representative),
signed consents to extend the statue limitations for income tax and FBAR
purposes, perhaps Statement on Dissolved Entities, copies of all offshore
financial account statements for each of the covered years (required if any one
year the aggregate highest account balance was $500,000 or more).
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Make a Voluntary Disclosure
• Special Issues Regarding Trusts and Underlying Corporations:
Disclosure of these entail special forms, e.g., Form 3520, Form 3520-A,
Form 5471. These entities, in effect, might be disregarded provided
they are dissolved.
• Examination: Normally, no comprehensive examination. "The normal
process is to assign the voluntary disclosure to an examiner to certify
the accuracy and completeness of the voluntary disclosure."
• Closing: After submission and resolution of any questions or additional
document requests, the IRS will present a Form 4549-A (Income Tax
Discrepancy Adjustments) and the taxpayer will enter into a Closing
Agreement (Form 906).
• Switching from One Thing to Another: Can start “quiet” and switch to
OVDP, provided examination has not started.
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Make a Voluntary Disclosure
• Tax Liability: Tax liability for each year calculated in normal way. Based on
amended returns. (Shortcut method available for PFIC income.)
• Tax, Penalties and Interest: Pay tax, interest and accuracy-related
• Penalty (20%), and, if applicable the failure to file and failure to pay
penalties (25%).
• FBAR Penalties: 27.5% of "high water" aggregate account balance.
Convert foreign currency by using yearend exchange rate. Include all
accounts even small accounts not reportable on FBAR. Include business
accounts for an active business. Penalty applies not only to financial
accounts holding cash and securities, but also tangible assets (real estate
and art) and intangible assets (stock or partnership interests in a US or
foreign business). Assets acquired with after-tax funds or funds not
subject to US tax and that are not income producing, are not affected.
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Make a Voluntary Disclosure
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How Long Does It Take? Depends, but a good guess is one year.
How Much Does It Cost? Cost of attorney and return preparer.
Taxpayers who are compliant on tax reporting but not FBARs: Don’t file in OVDP. File
delinquent FBARs with explanation; no penalties.
Can’t Pay: If can’t pay, work out terms. File Form 433-A.
Source of Additional Information: OVDP FAQs on IRS website.
5% FBAR Penalty Rule: Several different situations. One is: Taxpayer is foreign resident
and meets all 3 of following conditions for all year. (a) Taxpayer resides in a foreign
country; (b) taxpayer has made good faith showing that he/she has timely complied with
all tax reporting and payment requirements in the country of residency; (c) taxpayer has
$10,000 or less of U.S. source income each year. If met, the FBAR penalty will not apply to
non-financial assets, such as real property, business interests, or artworks, purchased with
funds as to which the taxpayer can show that all applicable taxes have been paid, either in
the U.S. or in the country of residence. This exception only applies if the income tax
returns filed with the foreign tax authority included the offshore-related taxable income
that was not reported on the U.S. tax return.
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Make a Voluntary Disclosure
• Opt Out: Taxpayer can opt out (elect to have the case removed
from the Program) if, for example, thinks the FBAR penalty as too
severe. A complete examination can be expected. There is no
protection from criminal prosecution. Specific Guidelines for Opt
Out and Removal apply.
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Make A Voluntary Disclosure Under The IRS
“Streamlined” Procedures
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Announced June 26, 2012
File 3 years back (income tax returns) and 6 years back (FBARs)
Available for non-resident US taxpayers that have resided outside US since Jan 1, 2009
and have not filed a US tax return during this period (not for people that filed and now
want to amend)
For “Low Risk” taxpayers, expedited review and no penalties. Determined based on
returns and information provided in a questionnaire. Less than $1,500 in tax due in
each year—treated as “low risk”. For higher risk taxpayers, don’t get streamlined
processing procedure.
Risk level rises with existence for claim for refund; “material economic activity in the
US; failure to declare income in home country; existence of financial interest or
authority over a account(s) outside home country; financial interest in an entity(ies)
outside home country; any U.S. source income; indications of sophisticated tax planning
or avoidance.
Does not provide protection from criminal prosecution.
Once “streamlined” filing is made, can’t go into regular OVDP.
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Additional Thoughts
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Door may be closing on Offshore Voluntary Disclosure Program.
My guess: When FATCA fully kicks in (July 2014? December 2014?), OVDP will be closed perhaps
with an “Last Call” announcement allowing 6 months (?)
• How long and how much?
It all depends upon the facts of your case. The costs are return preparation and legal. Return
preparation often will be the greater of the two. Ask for a flat fee per year for return and FBAR
preparation. From beginning discussions with attorney filing of Closing Agreement, a guess is one
year to complete. Legal costs generally tie to hours spent. You help yourself by shopping around
and doing a good job of gathering documents.
ACA WILL PUBLISH A DIRECTORY OF RETURN PREPARERS FOR
OVERSEAS AMERICANS BY JAN. 31, 2014.
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Beware of application of FBAR penalty to not just bank account balances.
What if I can’t pay or if paying will completely change my life?
Inability to pay is not a bar to participation in the Program. The case, in effect, goes Collection.
File Form 433-A at end of process. You might have to pay over some liquid assets. Normally you
would not lose your house. Normally, some retirement assets are protected. Recall that assets
located outside the US generally, but not always, are not reachable.
• Different options are fraught with arbitrary “cliffs”.
• New Information Document Request procedures create headaches .
Hard to “buy time”.
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QUESTIONS & ANSWERS
Charles M Bruce
Stéphane Lagonico
Guillaume Grisel
[email protected]
[email protected]
[email protected]
8, rue du Grand-Chêne
CH-1002 Lausanne
For additional information, call Guillaume Grisel at +41 21 348 1188
(General) or +41 21 348 1178 (Direct)
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