correcting foreign information reporting noncompliance...

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Correcting Foreign Information Reporting Noncompliance:

Voluntary Disclosure Programs

WEDNESDAY, FEBRUARY 5, 2020, 1:00-2:50 pm Eastern

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February 5, 2020

Correcting Foreign Information Reporting Noncompliance: Voluntary Disclosure Programs

Adam Fayne, Partner

Saul Ewing Arnstein & Lehr, Chicago

[email protected]

Brian Gardner, Tax Attorney

Fox Rothschild

[email protected]

Jeffrey M. Rosenfeld, Esq., Partner

Blank Rome

[email protected]

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT

MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

© Copyright 2020 Saul Ewing Arnstein & Lehr LLP

Identifying Foreign Information Noncompliance Scenarios

Adam Fayne, Partner

Saul Ewing Arnstein & Lehr

February 5, 2020


Introduction

• US Requires US Taxpayers to report worldwide income

• US Government Requires Disclosure –Forms and Amnesty Opportunities

• Cooperation Amongst Governments –Information Sharing

• Delinquency = Penalties (in most cases)

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Requirement to Report Foreign Assets and Income

• Types of items required to be reported to the IRS

▪ U.S. Taxpayer (Citizen, Green Card, other)

▪ Foreign Income

▪ Foreign Ownership of Certain Assets

▪ Foreign Bank Accounts

▪ Gifts of Foreign Funds

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Requirement to Report Foreign Assets and Income

• Example of Common Foreign Information Reporting Forms▪ Form 114a (aka FBAR)

▪ Form 5471

▪ Form 5472

▪ Form 3520

▪ Form 3520-A

▪ Form 8898

▪ Form 8621

▪ Form 8865/8858

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Example 1 - Noncompliance

During 2019, Adam is a US Citizen and lawyer at Saul Ewing in the United States. In the beginning of 2020, Adam moves to France to work out of the Paris office. Adam opens a bank account in Paris for his spending money while abroad.

What must Adam be aware of when filing his 2019 tax returns? What about his 2020 tax returns?

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Adam never leaves the United States to work but in 2019, Adam learns that he was the beneficiary of his wealthy German Aunt’s Swiss Account. This Swiss Account had over $1M USD in securities when Adam inherited it during 2019.

What must Adam report to the US Government? What if the Swiss account was held by a foreign trust? What are the potential penalties if Adam fails to report this account?

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During 2019, Adam is a 50% partner in an Israeli tech startup and has a controlling board seat. The Israeli company is owned by a US based LLC that Adam owns 25% of and is one of 2 board members.

What are some of Adam’s considerations that he should express to his accountant? What forms may be required to be filed.

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Example 4 – Non Compliance

During 2019, Adam’s cousin that is a Chinese citizen and lives in China gives Adam a gift of $200,000.00 USD to be applied to Adam’s children college savings plan.

Does Adam have to report this gift? Is this gift taxable?

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Example 5 – Non Compliance

Adam is a US Citizen and lives in Chicago, Illinois. He is a full time practicing attorney. He also sits on the Board of a Canadian Public Company that has assets all over the world and bank accounts in Canada. Adam has signature authority over the Canadian bank accounts but he is not a beneficiary of the funds in those foreign accounts.

What must Adam do to be in compliance with US laws?

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Thank You

Adam Fayne, Partner

Saul Ewing Arnstein & Lehr LLP

Chicago, IL

(312) 876-7883

[email protected]

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BaltimoreLockwood Place

500 East Pratt Street, Suite 900 Baltimore, MD 21202-3171

T: 410.332.8600 • F: 410.332.8862

Boston131 Dartmouth Street

Suite 501Boston, MA 02116

T: 617.723.3300 • F:617. 723.4151

Chesterbrook1200 Liberty Ridge Drive

Suite 200 Wayne, PA 19087-5569

T: 610.251.5050 • F:610.651.5930

Fort Lauderdale200 E. Las Olas Blvd.

Suite 1000Fort Lauderdale, FL 33301

T: 954.713.7600 • F: 954.713.7700

HarrisburgPenn National Insurance Plaza

2 North Second Street, 7th Floor Harrisburg, PA 17101-1619

T: 717.257.7500 • F: 717.238.4622

MiamiSoutheast Financial Center

200 S. Biscayne Blvd., Suite 3600Miami, FL 33131

T: 305.428.4500 • F: 305.374.4744

NewarkOne Riverfront Plaza

Newark, NJ 07102 T: 973.286.6700 • F:

973.286.6800

PhiladelphiaCentre Square West

1500 Market Street, 38th FloorPhiladelphia, PA 19102-2186

T: 215.972.7777 • F: 215.972.7725

PittsburghOne PPG Place

30th FloorPittsburgh, PA 15222

T: 412.209.2500 • F:412.209.2570

Washington1919 Pennsylvania Avenue, N.W.

Suite 550 Washington, DC 20006-3434

T: 202.333.8800 • F: 202.337.6065

West Palm Beach515 N. Flagler Drive

Suite 1400West Palm Beach, FL 33401

T: 561.833.9800 • F: 561.655.5551

Wilmington1201 North Market Street

Suite 2300 • P.O. Box 1266 Wilmington, DE 19899

T: 302.421.6800 • F: 302.421.6813

Chicago161 North Clark

Suite 4200Chicago, IL 60601

T: 312.876.7100 • F: 312.876.0288

New York1270 Avenue of the Americas, Suite

2005 New York, NY 10020 T: 212.980.7200 • F:

212.980.7209

Princeton650 College Road East, Suite 4000

Princeton, NJ 08540-6603 T: 609.452.3100 • F: 609.452.3122

Minneapolis33 South Sixth Street, Suite 4750

Minneapolis, MN 55402 T: 612.217.7130 • F: 612.677.3844

Streamlined Disclosure Program for Non-Willful delinquency

Brian Gardner

Fox Rothschild

404.870.3773

[email protected]

2019 © Taylor English Duma LLP

Introduction

Effective July 1, 2014, the IRS began to offer two types of Streamlined Procedures:

1. Streamlined Foreign Offshore Procedures (“SFOP”)• For U.S. taxpayers residing outside the United States

2. Streamlined Domestic Offshore Procedures (“SDOP”)• For U.S. taxpayers residing within the United States

According to the latest IRS announcement on the amnesty programs, about 65,000 taxpayers have thus far participated in the program.

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Streamlined Disclosure Program for Non-Willful Delinquency

• Taxpayers must certify that conduct was non-willful– Non-Willful conduct is conduct that is due to

negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law

• Must be voluntary disclosure– Taxpayer can’t be under civil or criminal examination.

• Taxpayers who have previously done quiet disclosures are eligible for streamlined procedures.

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Streamlined Foreign Offshore Procedure for Non-U.S. Residents

• Non-residency Requirement: If, in any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, the individual did not have a U.S. abode and the individual was physically outside the United States for at least 330 full days.

• Eligible Taxpayers Must:– (1) for each of the most recent 3 years for which the U.S. tax return due date

(or properly applied for extended due date) has passed, file delinquent or amended tax returns, together with all required information returns (e.g., Forms 3520, 5471, and 8938) and

– (2) for each of the most recent 6 years for which the FBAR due date has passed, file any delinquent FBARs (FinCEN Form 114).

– (3) The full amount of the tax and interest due in connection with these filings must be remitted with the delinquent or amended returns.

– (4) Submit Form 14653 certifying (a) that you are eligible for the Streamlined Foreign Offshore Procedures; (b) that all required FBARs have now been filed; and (c) that the failure to file tax returns, report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct.

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Determining Residency for Streamlined Programs

Taxpayers who are U.S. citizens or lawful permanent residents (e.g., Green Card Holders) are considered to reside outside the United States if:

For at least one of the three years in the Streamlined Period, the individual:

1. did not have a U.S. “abode” (generally, one’s home, habitation, residence, domicile, or place of dwelling); and

2. was physically outside the United States for at least 330 full days (meaning,the taxpayer did not spend more than 35 days in the United States).

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Determining Residency for Streamlined Programs

Taxpayers who are not U.S. citizens or lawful permanent residents are considered to reside outside the United States if:

In any one or more of the last three years for which the U.S. tax return due date (or properly extended due date) has passed, the taxpayer did not meet the “substantial presence” test.

“Substantial Presence”: Taxpayer must be physically present in the United States for at least:

1. 31 days during the current calendar year; and

2. a total of 183 days during the current year and the 2 preceding years, counting all the days of physical presence in the current year, but only one-third the number of days of presence in the first preceding year, and only one-sixth the number of days in the second preceding year.

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Examples of Non-Residency Requirement for Streamlined Procedures

• Example 1: Mr. W was born in the United States but moved to Germany with his parents when he was five years old, lived there ever since, and does not have a U.S. abode. Mr. W meets the non-residency requirement applicable to individuals who are U.S. citizens or lawful permanent residents.

• Example 2: Assume the same facts as Example 1, except that Mr. W moved to the United States and acquired a U.S. abode in 2012. The most recent 3 years for which Mr. W’s U.S. tax return due date (or properly applied for extended due date) has passed are 2013, 2012, and 2011. Mr. W meets the non-residency requirement applicable to individuals who are U.S. citizens or lawful permanent residents.

• Example 3: Ms. X is not a U.S. citizen or lawful permanent resident, was born in France, and resided in France until May 1, 2012, when her employer transferred her to the United States. Ms. X was physically present in the U.S. for more than 183 days in both 2012 and 2013. The most recent 3 years for which Ms. X’s U.S. tax return due date (or properly applied for extended due date) has passed are 2013, 2012, and 2011. While Ms. X met the substantial presence test for 2012 and 2013, she did not meet the substantial presence test for 2011. Ms. X meets the non-residency requirement applicable to individuals who are not U.S. citizens or lawful permanent residents.

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Benefits of Streamlined Foreign OffshoreProcedures

• Under this program, the taxpayer avoids all of the penalties normally associated with delinquency (e.g., failure-to-file and failure-to-pay penalties, accuracy-related penalty, information return penalties, FBARpenalties).

• The taxpayer is only required to pay unpaid taxes and applicable interest.

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Streamlined Offshore Procedures for U.S. Residents

• For taxpayers that are U.S. Residents there are several other requirements:– (1) have previously filed a U.S. tax return (if required) for

each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed;

– (2) have failed to report gross income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) and/or one or more international information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621) with respect to the foreign financial asset, and

– (3) such failures resulted from non-willful conduct.

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Streamlined Offshore Procedures for U.S. Residents

• (1) for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed, file amended tax returns, together with all required information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621),

• (2) for each of the most recent 6 years for which the FBAR due date has passed, file any delinquent FBARs and

• 3) pay a 5% miscellaneous offshore penalty. The full amount of the tax, interest, and miscellaneous offshore penalty due in connection with these filings should be remitted with the amended tax returns.

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Title 26 Streamlined Disclosure Penalty

• Penalty is 5% of the highest aggregate balance/value of the taxpayer’s foreign financial assets that should have been, but were not reported, for that tax year.

• This includes the following:– Highest aggregate bank account balances that were not reported on

FBAR– Assets not reported on a Form 8938 for that year.

• financial accounts held at foreign financial institutions;• financial accounts held at a foreign branch of a U.S. financial institution;• foreign stock or securities not held in a financial account;• foreign mutual funds; or• foreign hedge funds and foreign private equity funds.

– A foreign financial asset is also subject to the 5% miscellaneous offshore penalty in a given year in the covered tax return period if the asset was properly reported for that year, but gross income in respect of the asset was not reported in that year.

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Non-Willful Standard

In the Streamlined Submission Form, the taxpayer must certify the following:

“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 a good faith misunderstanding of the requirements of the law.”

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Non-Willful Certification

Prior to 2016, the Certification form required that taxpayers include a general narrative of factswhich lead to the failure to timely report all income, pay all tax, and submit all required information returns, including FBARs. In January of 2016, the form was significantly revised to require that the taxpayer’s explanation of non-willfulness include the following:

• Specific reasons for your past failure, whether favorable or unfavorable to you, including your personal background, financial background, and anything else you believe is relevant to yourfailure.

• An explanation as to the source of funds in all of your foreign financial accounts/assets. Forexample, explain whether you inherited the account/asset, whether you opened it while residing in a foreign country, or whether you had a business reason to open or useit.

• An explanation of your contacts with the account/asset including withdrawals, deposits, and investment/ management decisions.

• A complete story about your foreign financialaccount/asset.

• If you relied on a professional advisor, provide the name, address, and telephone number ofthe advisor and a summary of the advice (this requirement was previously included).

• If married taxpayers submitting a joint certification have different reasons, provide the individual reasons for each spouse separately in the statement of facts (this requirement wasalso previously included).

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Commons Scenarios Indicating Non-Willfulness

• Taxpayer always lived abroad (e.g., “accidental American”) or at least lived abroad as adult or during years of employment

• Taxpayer living abroad has diligently filed and paid taxes in foreign country

• Taxpayer has a close connection to the foreign country (family, employment, etc.)

• Taxpayer has no post-secondary school education, and either no degree or an undergraduate degree in the arts or sciences and not one in taxation or finance

• Taxpayer inherited the account or asset from a parent who lives in the foreign country

• Taxpayer’s parent put assets in Taxpayer’s name without their knowledge.

• The funds in the account originated offshore

• Taxpayer has limited income and owes no tax or little tax

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Common Scenarios Indicating Non-Willfulness

• Taxpayer living abroad has bank accounts only in his or her country ofresidence

• Taxpayer has during the filing period suffered severe emotional, medical, family or business hardships

• The Taxpayer’s accountant did not inquire about offshore bank accounts or provide a tax organizer to clients

• For US resident, the Taxpayer has recently immigrated to the U.S.

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IRS Evaluation of Streamlined Submission

• The IRS does not send successful applicants an acceptance or closing letter.

• Best case scenario is that the Taxpayer’s representative never hears from

the IRS.

• If the IRS does not receive adequate information in the Streamlined

submission, they will follow up with the taxpayer and ask for that information.

• Typical issues are:

• More detailed account information

• More detailed foreign entity information

• More information about the professional whose advice you relied upon

• A further explanation to support your claim of non-willful conduct

• The IRS will also compare the information given in the Certification form to the

tax returns and FBARs filed to make sure that it is consistent.

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Streamlined Program Challenges

• Entities (corporations, partnerships, trusts) are not allowed to participate.

• If the IRS receives or discovers evidence of willfulness or criminal conduct on the part of the taxpayer (e.g., information received from foreign governments or financial institutions), the IRS could open an examination or investigation that could lead to civil fraud penalties, FBAR penalties, information return penalties, or even a referral to Criminal Investigation.

• Submitting returns using the Streamlined filing procedures does not guarantee immunity from criminal prosecution.

• Tax years outside years covered in the Streamlined submission are open toexamination and audit by the IRS.

• Taxpayers will have to find a way to pay the 5% penalty. The IRS collection unit is not as forgiving for Taxpayer’s owing due to undisclosed foreign assets.

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Offshore Voluntary Disclosure Program

• **OLD PROGRAM THAT CLOSED ON 9/28/18**

– Penalty between 27.5% and 50% - depends on where the taxpayer banked and whether the taxpayer acted willfully.

– Look back period of 8 years.

– Penalty is on non-compliant assets (e.g., foreign accounts, income producing real estate, artwork purchased with funds escaping U.S. taxation, foreign businesses, etc.)

– Best Option for:

• FBARs and information returns not filed.

• Significant taxable income to pick up.

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OVDP – 50% Penalty

**OLD PROGRAM THAT CLOSED ON 9/28/18**

50% penalty in OVDP if foreign financial institution is:• (1) under investigation by the IRS or Department of Justice,

• (2) cooperating with the IRS or Department of Justice in connection with accounts beneficially owned by a U.S. person, or

• (3) has been identified in a court-approved issuance of a summons seeking information about U.S. taxpayers who may hold financial accounts (a “John Doe summons”) at the foreign financial institution

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New Voluntary Disclosure Practice (Voluntary Disclosure Received after 9/28/18)

• In general: – Six-year disclosure period

– Disclosure period will require examinations of the most recent six tax years

– Disclosure and examination periods may: • (1) be longer if the voluntary disclosure is not resolved by

agreement;

• (2) be shorter if the noncompliance is less than six years; and

• (3) if the taxpayer wants to expand beyond 6 years to clean up a prior issue (e.g., on a sale of the company)

• Taxpayers must submit all required returns and reports for the disclosure period

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• Penalties: – Absent special circumstances, the civil penalty under I.R.C. § 6663 for fraud or the

civil penalty under I.R.C. § 6651(f) for the fraudulent failure to file income tax returns will apply to the one tax year with the highest tax liability. This penalty can be as high as 75% of the underpayment of tax.

– Willful FBAR penalties will be asserted in accordance with existing IRS penalty guidelines under IRM 4.26.16 and 4.26.17. This is generally a 50% penalty on the highest account balance over the preceding 6 years.

• Civil – Negligence (applies only to trades or businesses): up to $500 assessed against a financial institution or non-

financial trade or business for any negligent violation of the Bank Secrecy Act (BSA), including FBAR violations

– Pattern of Negligent Activity (applies only to trades or businesses): up to $50,000 assessed for a pattern of negligent violations

– Non-Willful: not to exceed $10,000 per violation. Penalty should not be imposed if the violation was due to reasonable cause and the person files any delinquent FBARs and properly reports the previously unreported account

– Willful: not to exceed $100,000 or 50% of the balance in the account at the time of the violation

• Criminal– Fines of up to $250,000 and 5 years of jail time

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• Penalties (continued): – A taxpayer is not precluded from requesting the imposition of

accuracy related penalties under I.R.C. § 6662 instead of civil fraud penalties or non-willful FBAR penalties instead of willful penalties.

– Given the objective of the voluntary disclosure practice, granting requests for the imposition of lesser penalties is expected to be exceptional. Where the facts and the law support the assertion of a civil fraud or willful FBAR penalty, a taxpayer must present convincing evidence to justify why the civil fraud penalty should not be imposed.

– Penalties for the failure to file information returns will not be automatically imposed.

– Taxpayers retain the right to request an appeal with the Office of Appeals

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• Process:– Preclearance: complete and submit Part I of Form 14457,

Voluntary Disclosure Practice Preclearance Request and Application

• Disclose more during preclearance than taxpayers historically have been required to disclose

– Upon receipt of preclearance confirmation, submit Part II of Form 14457 within 45 days or submit a written request for additional time

– Submit all required returns and reports for the disclosure period

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Example - New Voluntary Disclosure Practice (Voluntary Disclosure Received after 9/28/18)

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• Facts: Taxpayers owns a swiss-bank account with a balance of $1mm, have an interest in a foreign trust that holds real estate valued at $1mm, and taxable income that resulted in tax due over the last 6 years of $20k per year ($30,000 in 2016).

Delinquent International Information Return Submission Procedures

• Available to those taxpayers who:

– Have not filed the required information returns

– Are not under civil or criminal investigation by the IRS

– Have not been contacted by the IRS about delinquent information returns

– Have “reasonable cause” for not timely filing the information returns

• No automatic penalty

• No designated look back period; recommended look back period will depend on the facts and circumstances of the case.

• Designed for taxpayers who have reported all foreign income, but failed to file certain international information returns.

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• Examples of forms that may need to be filed:

– Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts

– Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations

– Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation

– Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs)

– Form 8938, Statement of Specified Foreign Financial Assets

• Best option for:

– Taxpayer properly reported on U.S. tax returns, and paid all tax on, all foreign income; and

– Taxpayer has not previously been contacted regarding an income tax examination or a request for delinquent information returns for the; and

– Taxpayers have no taxable income that is required to be picked up on an amended return.

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• Examples of situations where this process may apply:

– US taxpayers receive gifts totaling more than $100k from their parents who were not US taxpayers. First CPA advised the taxpayers that there is no need to report since subject to taxation even though Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts should have been filed with the IRS. Taxpayers had no knowledge of this requirement. When taxpayers engaged a new CPA they were advised to file Form 3520s with statements explaining reasonable cause. At the time this noncompliance was discovered by taxpayers, there was no audit or inquiry by the IRS, no tax due as a result of the error, and taxpayers had a perfect compliance history. Provided by the blog “Procedurally Taxing”.

– A non-U.S. person is the sole shareholder of several U.S. real estate holding companies. Taxpayer fell behind on filing returns because of health issues. Son takes over business and discovers that Forms 1120 had not been filed. Son then files Forms 1120, including Forms 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation, and a reasonable cause statement explaining father’s health issues. Son then files returns for applicable years. Provided by the blog “Procedurally Taxing”.

– Nov. 19, 2019: An IRS official stated that the IRS cannot currently provide a definitive answer as to whether a taxpayer must report offshore cryptocurrency holdings on IRS Form 8938, Statement of Specified Foreign Financial Assets (Form 8938). To avoid potential information return reporting penalties, the IRS official stated that taxpayers may want to report offshore cryptocurrency holdings on Form 8938. Provided by Holland & Knight, Virtual Currency: The Taxman is Coming, December 4, 2019.

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Delinquent FBAR Submission Procedures

• No Penalty if no taxable income to report• No designated look back period; recommended to file 6 years

of FBARs.• To use this procedure, taxpayers should file the delinquent

FBARs according to the FBAR instructions and include a statement explaining why the FBARs are filed late – is this accurate?.

• Designed for taxpayers who picked up all income but failed to file FBARs.

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

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Delinquent FBAR Submission Procedures

• Best option for:

– Taxpayer properly reported on U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs; and

– Taxpayer has not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted; and

– Taxpayers have no taxable income that is required to be picked up on an amended return.

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Thank You

Jeffrey M. Rosenfeld, Esq., Partner

[email protected]

correcting foreign information reporting noncompliance...

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